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Financial Supervisory Service 38 Yeoui-Daero, Youngdeungpo-Gu, Seoul 07321, REPUBLIC OF KOREA Telephone: +82-2-3145-7897. Email: [email protected]
Financial Supervisory Service
38 Yeoui-Daero, Youngdeungpo-Gu, Seoul 07321, REPUBLIC OF KOREATelephone: +82-2-3145-7897. Email: [email protected]
About FSS HANDBOOK 2020
The FSS HANDBOOK 2020 is a general reference for Korea’s financial regulation and supervision that the Financial Supervisory Service publishes in English as a public service. A PDF version of this publication is freely available online at the FSS English homepage (english.fss.or.kr). Please email your inquiry concerning this publication to [email protected]. For more up-to-date information that may be available in Korean, please visit FSS Korean Internet website (fss.or.kr).
Disclaimer
The FSS HANDBOOK 2020 is published for general informational use only. While utmost care is taken to be faithful to the Korean source text from which the content of this publication is drawn, the English translation may nevertheless contain unintended errors or inaccuracies. The reader is advised that the FSS HANDBOOK 2020 does not carry the force or the effect of any law or regulation, and the FSS makes no representation about the accuracy or completeness of the content of this publication and assumes no liability for any discrepancy, error, or inaccuracy in the English translation.
Copyright and Attribution
The content of the FSS HANDBOOK 2020 should be assumed to be protected under the copyright laws of the Republic of Korea and as applicable elsewhere. Information obtained from this publication should be attributed to the Financial Supervisory Service of Korea.
FSS HANDBOOK 2020
CONteNtS
1. Financial Supervisory Service 1Integrated Financial Supervision 1Related Oversight Authorities 3
2. FSS-Supervised Financial Institutions 7General Classification of Financial Institutions 7Banks 7Nonbank Financial Institutions 10Financial Investment Service Providers 11Insurance Companies 12Financial Holding Companies 13Other Financial Services Providers 13
3. Prudential Supervision 15Classification of Business Activities 15Business Conduct Regulation 21Capital Adequacy 36Prudential Standards 40Supervisory Review of Financial Products and Services 50
4. Supervisory evaluation and Rating 53Supervisory Evaluation 53Component and Composite Ratings 56
5. examination 65Examination Process 65
6. Capital Market Supervision 71Disclosure Rules 71Unfair Trading and Enforcement 87Accounting Supervision 92
7. Consumer Protection 97Consumer Protection Mandate 97Consumer Complaint Mediation 98
APPeNDICeS
A. Incorporation of Financial Service Company 100B. Legal and Regulatory Structures 112C. FSS Financial Statistics 116D. FSS DART 117E. Selected Financial Sector Data 118
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tABLeS
1. Basel III Capital Requirements and Phase-in Arrangements 372. Capital Requirements 373. Standard Asset Classification Criteria 424. Asset Classification Criteria 435. Minimum Allowances for Bank Credit Losses 456. Asset Classification for Nonbank Financial Institutions 457. Minimum Allowances for Credit Losses of Nonbank Financial Institutions 468. Credit Extension Limits for Nonbank Financial Institutions 479. Prudential Guidance Ratios for Nonbank Financial Institutions 4710. Rating Components and Evaluation Factors 5511. Commercial Bank Component and Composite Ratings 5812. Capital Adequacy and Prompt Corrective Action 6213. Supervisory Rating and Prompt Corrective Action 6214. Remedial Actions under Prompt Corrective Action 6315. Types of Sanctions 6816. Waiting Period for Registration Statement 7317. Legal Framework for Accounting Supervision 9318. Financial Dispute Resolution Process 9919. Incorporation Requiring Registration, Authorization, or Approval 10120. Minimum Incorporation Capital Requirements 103
FIguReS
1. General Examination Process 692. General Rulemaking Process 115
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ABBReVIAtIONS
AEFSC Act on the Establishment of the Financial Services CommissionCAEL Capital, Asset Quality, Earnings, and LiquidityCAMEL-R Capital, Asset Quality, Management, Earnings, Liquidity, and Risk ManagementCAMELS Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market RiskCET 1 Common Equity Tier 1CIS Collective Investment SchemeFCPB Finanal Consumer Protection BureauFDSC Financial Dispute Settlement CommitteeFHC Financial Holding CompanyFISCMA Financial Investment Services and Capital Markets ActFISIS Financial Statistical Information SystemFISP Financial Investment Service ProviderFSC Financial Services CommissionFSS Financial Supervisory ServiceIFRS International Financial Reporting StandardsLCR Liquidity Coverage RatioMID Management Improvement DemandMIO Management Improvement OrderMIR Management Improvement RecommendationNCR Net Capital RatioNFE Non-Financial EntityNOCR Net Operating Capital RatioNSFR Net Stable Funding RatioPEF Private Equity FundRAAS Risk Assessment Application SystemRBC Risk-Based CapitalSBL Substandard or Below LoanSFC Securities and Futures CommissionSPC Special-Purpose Company
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1 Financial Supervisory Service
Integrated Financial Supervision
The Financial Supervisory Service (FSS) is Korea’s integrated financial supervisory authority responsible for the safety and soundness of financial institutions across the financial sector. It examines and supervises financial institutions in order to ensure they operate in a safe and sound manner, serve consumers and investors, and comply with rules and regulations. The FSS also performs capital market supervision and undertakes wide-ranging initiatives to protect investors and consumers from malpractices of financial firms.
The FSS was officially established on January 2, 1999, pursuant to the Act on the Establishment of Financial Supervisory Organizations, which the National Assembly approved on December 29, 1997. Under the law, the FSS is set up as a specially legislated quasi-government supervisory authority charged with financial supervision across the entire financial sector.
Prior to the creation of the FSS, financial supervision was carried out by four separate sector-based authorities with the finance ministry exercising significant overarching oversight powers. For banking sector supervision, the Office of Banking Supervision under the Bank of Korea conducted examination of commercial banks and foreign bank branches, while the finance ministry assumed the primary responsibility for the oversight of government-affiliated policy banks known as specialized banks and nonbank credit institutions. Similarly, securities sector supervision was shared by the Securities Supervisory Board and the finance ministry, and insurance sector supervision by the Insurance Supervisory Board and the finance ministry. Supervision of other nonbank financial institutions was generally divided between the finance ministry and the Bank of Korea’s Office of Banking Supervision.
Although institutional and systemic shortcomings that came to light during the 1997 Asian financial crisis reinforced the need for reform of the regulatory and supervisory
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frameworks and structures, there was a broad recognition, even before the crisis, of changes needed to deal with the evolving financial market landscape.
These ranged from the accelerating convergence of financial services to the blurring of the traditional boundaries between banking and nonbank activities. The confluence of financial market liberalization, deregulation, and globalization that were gathering momentum across countries at the time also pointed to the need for bold systemic reform to improve the effectiveness of Korea’s financial regulation and supervision.
Recognizing the exigency of reform, the government set up a presidential committee in January 1997 to explore new approaches that were needed in order to bring about more efficient and more robust financial regulation and supervision. The committee followed up with recommendations that culminated in the creation of the Financial Supervisory Commission, the predecessor to the Financial Services Commission, as the integrated regulatory authority on April 1, 1998. This was followed by the creation of the FSS as the integrated supervisory authority on January 2, 1999.
As part of major government reorganization in 2008, the Financial Supervisory Commission took on the policy functions of the Financial Policy Bureau under the finance ministry and became the Financial Services Commission (FSC) on February 29, 2008. The name of the Act on the Establishment of Financial Supervisory Organizations was also changed to the Act on the Establishment of the Financial Services Commission (AEFSC) as part of the reform drive.
Under the two-tier system the AEFSC has created, the FSC assumes the primary responsibility for rulemaking and licensing, major enforcement decisions, and the government’s financial market policy, while the FSS principally conducts prudential supervision, capital market supervision, consumer protection, and other oversight and enforcement activities as delegated or charged by the FSC. The FSS also performs administrative functions in support of the rulemaking and licensing activities of the FSC.
As the government regulatory authority, the FSC is staffed by career civil servants, but the FSS as a specially legislated supervisory authority is staffed by private sector professionals who are not part of the government civil service system. The total number of FSS employees including supervisors, examiners, and support staff at the end of 2019 was 1,961.
ORGANIZATION
The FSS was organized into ten divisions comprising 40 departments and 22 offices as of February 2020. Each of the departments and offices under the ten divisions is charged with specific function, tasks, and responsibilities ranging from administrative support and examination to consumer protection endeavors. Each of the ten divisions is headed by a deputy governor and each of the 40 departments by a director general. In addition to its headquarters in Seoul, the FSS maintains 11 regional and district offices nationwide and seven representative offices overseas. The Office of the Chief Executive Auditor, which comprises an internal audit office and an inspection office, is responsible for internal audit, inspection, and compliance.
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Fees collected from financial institutions and securities issuers as well as appropriation from the Bank of Korea make up most of the FSS’s operating budget. The relative share of fees to be contributed by the regulated financial institutions is determined annually by the FSC on the basis of the total amount of the liabilities of the regulated financial institutions at the end of the previous fiscal year, subject to certain restrictions. The relative share to be collected from securities issuers is also determined by the FSC on the basis of the total amount of securities issued. When approving the budget for a fiscal year, the FSC considers the current funding level and other financial factors and conditions. For the fiscal year 2020, the total operating budget was KRW363.0 billion with supervision fees from financial institutions making up approximately 76.8 percent of the total amount; securities registration fees and contributions from the Bank of Korea each accounted for 24 percent and 2.75 percent of the total.
GOVERNANCE
The FSS is headed by the governor, the highest-ranking executive. Under the AEFSC, up to four senior deputy governors and nine deputy governors may be appointed under the governor. The chief executive auditor is the officer responsible for internal audit and compliance. The governor is appointed by the president with the recommendation of the chairman of the FSC. The governor, the senior deputy governors, and the deputy governors (including the chief accountant) each serve a three-year term that may be renewed. As of June 2020, four senior deputy governors and nine deputy governors were serving under the governor.
Related Oversight Authorities
The FSS collaborates and coordinates its supervision activities with the FSC, the Bank of Korea, and the Korea Deposit Insurance Corporation in order to ensure timely and effective examination and supervision. The FSS also routinely shares supervisory information with other oversight authorities on a regular basis as part of its safety and soundness mandate.
FINANCIAL SERVICES COMMISSION
As the government regulatory authority, the FSC is vested with broad powers under the AEFSC to set the government’s financial market policies, propose amendments to financial legislation to the National Assembly, make rules, grant regulatory licenses, and decide on major enforcement actions. Under the two-tier system created by the AEFSC, the FSS is subordinate to the FSC and subject to FSC oversight in respect of its inspection, examination, investigation, and enforcement activities.
The FSC is led by nine commissioners that include the chairman and the vice chairman. Each commissioner serves a three-year term. The chairman is
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appointed by the president with the recommendation of the prime minister. The vice chairman, who is appointed by the president with the recommendation of the FSC chairman, concurrently holds the position of the chairman of the Securities and Futures Commission (SFC).
Two standing commissioners are appointed with the recommendation of the chairman of the FSC. Of the five non-standing commissioners, four are ex-officio positions held by the vice minister of the Ministry of Economy and Finance, the governor of the FSS, the deputy governor of the Bank of Korea, and the president of the Korea Deposit Insurance Corporation. The remaining non-standing commissioner is appointed with the recommendation of the chairman of the Korea Chamber of Commerce and Industry, who recommends an industry representative.
The FSC is a government agency whose officers are barred from holding any political position or engaging in any commercial activity during his/her tenure on the Commission. The nine commissioners are also barred from participating in the resolution of matters that may raise conflict of interest. Matters that come before the commissioners for resolutions are passed by the majority of the quorum. As part of its regulatory mandate, the FSC deliberates and decides on policy matters directly pertaining to the supervision of financial institutions and the securities and futures markets. (Matters relating to the securities and futures markets are largely delegated to the SFC.)
SECURITIES AND FUTURES COMMISSION
The SFC is a regulatory commission integrated within the FSC structure that performs the oversight of the securities and futures markets. It consists of five members who are appointed by the president for a renewable three-year term. The vice chairman of the FSC concurrently holds the position of the chairman of the SFC. The standing commissioner and three non-standing commissioners are appointed with the recommendation of the chairman of the FSC. The principal role of the SFC is to direct investigations of market misconduct and abuse such as insider trading and market manipulation in the securities and futures markets and to establish accounting and audit standards. In addition, the SFC conducts preliminary review of regulatory matters relating to the securities and futures markets that are to be deliberated by the FSC.
BANK OF KOREA
The Bank of Korea, established in June 1950 pursuant to the Bank of Korea Act, is Korea’s central bank. The Monetary Policy Committee, the highest decision-making body within the central bank, sets monetary policies in pursuit of price stability and employment. Because of the Bank of Korea’s long-standing interest in preserving a safe and sound banking system, the FSS maintains close cooperative institutional relationship and arrangements with the Bank of Korea.
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In respect of banking supervision, the Bank of Korea may, when deemed necessary, request that the FSS conduct an examination of a specific financial institution or conduct a joint examination with the participation of specialists from the Bank of Korea. The Bank of Korea may also request that the FSS share the findings of examination conducted at the request of the Bank of Korea and take appropriate supervision actions. The information-sharing MOU between the FSS and the Bank of Korea provides for practically unrestricted information exchange for financial supervision and banking safety and soundness purposes unless specifically prohibited under the law for privacy or other applicable grounds.
KOREA DEPOSIT INSURANCE CORPORATION
The Korea Deposit Insurance Corporation was established on June 1, 1996, following the enactment of the Depositor Protection Act on December 29, 1995, to protect depositors and help maintain the stability of the banking system. When deemed necessary for the depositor protection mandate as provided for under the Depositor Protection Act, the Korea Deposit Insurance Corporation may request that the FSS carry out an examination of an insured institution independently or jointly with the Korea Deposit Insurance Corporation. The Korea Deposit Insurance Corporation has signed an MOU with the FSS to facilitate active information sharing on an ongoing basis.
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2 FSS-Supervised Financial Institutions
General Classification of Financial Institutions
For supervision purposes, financial institutions that are supervised by the FSS are broadly classified into four types: banks, nonbank financial institutions, financial investment service providers, and insurance companies. Financial holding companies that are established under the Financial Holding Companies Act are also supervised by the FSS.
Banks comprise commercial banks, specialized banks, and foreign bank branches. Nonbank financial institutions on the other hand refer to mutual savings banks, specialized credit finance companies, and mutual credit cooperatives comprising credit unions, agricultural, fisheries, and forestry cooperatives, and community credit cooperatives. Financial investment service providers (FISPs) comprise securities companies, futures companies, asset management companies, investment advisors, and others engaging in securities trading as brokers and dealers, collective investment schemes, investment advisory services, discretionary investment services, and trust services. Insurance companies refer to life insurance companies, nonlife insurance companies, and “hybrid” insurance companies.
Banks
Banking institutions that the FSS supervises are classified into domestic banks and foreign bank branches. Domestic banks comprise commercial banks and specialized banks, and commercial banks are further divided into national banks, regional banks, and internet banks, which are incorporated pursuant to the Banking Act, the legislation governing banking institutions in Korea.
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National banks and internet banks operate nationwide, while regional banks are subject to certain geographic restrictions in their business operations. Specialized banks refer to government-affiliated policy banks that have been established under individual legislation enacted by the National Assembly. The Banking Act in principle recognizes foreign bank branches as equivalent to domestic banks in respect of banking activities and for supervision purposes.
2.1 DOMESTIC BANKS
Domestic banks comprise commercial banks and government-affiliated policy banks known as specialized banks.
2.1.1 Commercial banks Commercial banks are further classified into national banks, regional banks1 and internet banks. National banks operate nationwide while regional banks are subject to certain geographical restrictions. National banks operate throughout the country without any regional restriction. The number of national banks grew from five at the end of 1979 to 16 by the end of 1997 on the back of financial market liberalization. Following the 1997 Asian financial crisis, which caused systemic stresses of unprecedented scale to the banking industry, the number of national banks fell to seven as a result of mergers and dissolutions. From January 1998 to September 2001, a total of five commercial banks (three national banks and two regional banks) were closed through purchase and acquisition, and a total of 11 banks (six national banks, two regional banks, and three specialized banks) were merged to form five banks (four national banks and one specialized bank). At the end of 2019, six national banks— KB Kookmin, Shinhan, Woori, KEB Hana, Standard Chartered Bank Korea, and Citibank Korea—were in business. Regional banks were first established in 1967 as part of the government’s effort to better balance regional economic development and provide financial services to underserved consumers in rural and regional areas. At the end of 1997, there were ten regional banks in operation, but the number fell to six following closures and mergers in the wake of the 1997 financial crisis. Like national banks, regional banks maintain branch banking within their respective localities and primarily serve small- and medium-sized enterprises, households, and individual borrowers in their respective regions. At the end of 2019, a total of six regional banks—DGB Daegu, BNK Busan, BNK Gyongnam, Gwangju, Jeonbuk, and Jeju—were operating.
1 Banking institutions are sometimes divided into domestic banks and foreign bank branches with domestic banks comprising national banks, regional banks, internet banks and specialized banks.
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Two internet banks—K Bank and Kakao Bank—started banking services in April and July, 2017, respectively, pursuant to the Banking Act. Internet banks provide online banking services exclusively pursuant to article 2 of the Act on Special Cases Concerning Establishment and Operation of Internet Banks, which took effect on January 17, 2019. Unless specified otherwise in the act, banking services that internet banks provide are subject to the Banking Act. Both K Bank and Kakao Bank were granted business licenses following regulatory review and approval pursuant to the Banking Act. In December 2018, the FSC announced plans to license a new internet bank to further promote innovation and competition in the banking sector. The FSC followed up by amending the Enforcement Decree on the Act on Special Cases Concerning Establishment and Operation of Internet Banks on January 15, 2019.
2.1.2 Specialized banks
Specialized banks were established during the 1960s primarily to supplement the commercial banks in areas where they could not supply sufficient funds due to limited capital and also to support specific industrial sectors that were given priority by the government in its economic development plans. As the banking landscape evolved, however, the specialized banks began to expand their businesses into commercial banking. Their share of capital allocation to the specific sectors they were originally intended to serve is still relatively high. In raising funds, specialized banks primarily rely on public funds and bonds, although they compete with commercial banks for deposits. Five banking institutions operate as specialized banks under their respective legislation. They are the Korea Development Bank, the Export-Import Bank of Korea, the Industrial Bank of Korea, NongHyup Bank, and Suhyup Bank.
2.2 FOREIGN BANK BRANCHES
Foreign bank branches were first permitted to operate in Korea in 1967 as part of government initiatives to stimulate foreign capital investment and improve access to international capital markets. In 1984, the government began to remove restrictions on foreign branch operations in an effort to level the playing field for foreign banks, and in 1991 significantly eased regulations on foreign banks to promote greater competition among banking organizations operating in Korea. For instance, the government allowed foreign banks to open multiple branches under the same standards and procedures as those applied to domestic banks and to compete on equal footing with domestic banks. Traditionally, foreign bank branches in Korea specialized in wholesale banking. As a result of growing market liberalization and deregulation, however, foreign banks have recently been competing with domestic banks on wider-ranging banking businesses.
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Nonbank Financial Institutions
For supervision purposes, financial service provider that are not classified as a bank, a financial investment service provider, or an insurance company are collectively referred to as nonbank financial institutions or NBFIs. Nonbank financial institutions are broadly divided into three groups: mutual savings banks, specialized credit finance companies, and mutual credit cooperatives.
2.3 MUTUAL SAVINGS BANKS
Mutual savings banks are regulated depositary institutions that provide retail and small business banking in limited scope and scale. Although they are deposit-taking institutions and carry on commercial banking on a limited scale, they are not classified as banks for supervision purposes because they are incorporated and regulated pursuant to the Mutual Savings Banks Act, not under the Banking Act as is the case for the commercial banks.
2.4 SPECIALIZED CREDIT FINANCE COMPANIES
Specialized credit finance companies comprise credit card companies, leasing companies, installment finance companies, and new technology venture capital companies. All specialized credit finance companies are subject to the FSS supervision. Initially, they were governed by respective legislations. Then in August 1997, the Specialized Credit Finance Business Act was enacted, incorporating all types of specialized credit finance businesses. Under the Specialized Credit Finance Business Act, credit card companies are only required to obtain authorization/approval for the stability of the system while leasing companies, installment finance companies, and new technology venture capital companies may carry on businesses after registration with the FSC/FSS.
2.5 MUTUAL CREDIT COOPERATIVES
Credit unions and credit cooperatives, collectively referred to as mutual credit cooperatives, are not-for-profit financial cooperatives that are owned and controlled by members who share a common place of residence, workplace, organization, community or are tied by other associations. Under the law, the following mutual credit cooperatives are recognized:
• Credit unions and their national federation (the National Credit Union Federation of Korea);
• Agricultural cooperatives and their national federation (the National Agricultural Cooperative Federation);
• Fisheries cooperatives and their national federation (the National Federation of Fisheries Cooperatives);
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• Forestry cooperatives and their national federation (the National Forestry Cooperative Federation); and
• Community credit cooperatives and their national federation (the Korean Federation of Community Credit Cooperatives).
Of the recognized mutual credit cooperatives, community credit cooperatives and their national federation fall under the oversight of the Ministry of the Interior and Safety, and the rest are supervised by the FSS. By assets, credit unions are the largest.
Financial Investment Service Providers
Financial investment service provider (FISP) refers to a financial services firm authorized or registered to engage in one or more of the six financial investment services as classified in the Financial Investment Services and Capital Markets Act (FISCMA). FISCMA, which was enacted in August 2007 to consolidate six capital market-related acts into one overarching act, provides for function-based supervision of securities and investment services that are collectively referred to as “financial investment service” and reclassifies previous service areas into six new categories of financial investment services: dealing, brokerage, collective investment schemes, investment advisory services, discretionary investment services, and trust services. Under FISCMA, FISPs that have a direct creditor-debtor relationship with investors or are entrusted to hold and administer investors’ assets–dealers, brokers, trust service providers, and collective investment service providers–must obtain authorization from the FSC/FSS; those that have no discretion over investors’ assets–discretionary service providers and investment advisors–need only registration. The Enforcement Decree of FISCMA sets out detailed requirements for authorization and registration depending on the function of a financial investment service. The function is grouped into 87 categories in consideration of the type and scope of a financial investment service and investor type, and FISPs must obtain authorization or registration for the specific categories that they intend to engage in.
FSS-supervised FISPs are securities companies, asset management companies, futures companies, trust companies, investment advisory companies, and discretionary investment companies. Securities companies are broker-dealers that act as an intermediary between businesses issuing securities and investors buying the securities. Asset management companies engage in the management of beneficiary certificates and mutual fund assets. Futures companies trade futures contracts that are based upon financial instruments and physical commodities. Futures trading began with the establishment of the Korea Futures Exchange in 1999. Trust companies, which act as a fiduciary or trustee of trusts, had been supervised by the Ministry of Finance and Economy until the FSS was established and took over the oversight function in 1998. Banks and securities companies were enabled to concurrently carry on trust businesses in 1983 and 2005, respectively.
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In addition to FISPs, the FSS supervises certain entities, collectively referred to as financial investment service-related institutions under FISCMA, that engage in limited activities closely related to financial investment services. They include credit rating agencies, merchant banks, money brokerage companies, and short-term finance companies. Merchant banks provide extensive corporate finance services such as bill discounting and equipment financing. They emerged in the mid-1970s to privately raise foreign capital necessary to keep pace with a rapidly growing economy and changing capital needs of businesses. Money brokerage companies broker funding between financial institutions. The first money brokerage company opened in 2000, and ten companies are currently operating.
Insurance Companies
Insurance companies are financial services companies that offer life, nonlife, and hybrid insurance products and services. The Insurance Business Act broadly classifies insurance into life insurance, nonlife insurance, and hybrid insurance. Whereas life insurance gives protection against death in the form of a payment to a beneficiary, nonlife insurance generally provides property and casualty coverage and includes reinsurance and guaranty insurance. Following a major overhaul of the Insurance Act in 2003, hybrid insurance was created as a separate business category in addition to life and nonlife insurance for products providing coverage for illness, injury, and long-term care.
Insurance provided by mutual aid associations such as the Postal Insurance are supervised by competent government departments in lieu of the FSS. Some criticism has been leveled against the uneven playing field for mutual aid insurance providers because of their exclusion from the Insurance Business Act and the more relaxed regulations they face than insurance companies. In response, supervisory standards have been amended to require mutual aid providers that sell insurance to the public in addition to their members to comply with the same level of regulations as insurance companies. In addition, steps have been taken to enable the FSC/FSS to jointly manage and supervise the financial soundness of mutual aid insurance providers in coordination with their competent authorities.
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Financial Holding Companies
Financial holding companies were created by the Monopoly Regulation and Fair Trade Act with the goal of facilitating corporate and financial restructuring in the wake of the 1997 Asian financial crisis. However, because of ownership restrictions under the Banking Act, it was virtually impossible to establish a financial holding company with control over a bank. In this context, the Financial Holding Companies Act, which is independent of the Monopoly Regulation and Fair Trade Act, was enacted in October 2000. The Financial Holding Companies Act provides for group-wide supervision of financial holding companies and their subsidiaries.
Under the Financial Holding Companies Act, a financial holding company is defined as a company of which primary business is to control, through the acquisition of the subsidiary’s stock or equity, at least one financial institution or one company that carries on finance-related businesses. To be deemed to have control over a subsidiary, a financial holding company must be the largest shareholder of the subsidiary either alone or with specially related persons. In addition, the combined value of stocks and equities held by the financial holding company in the subsidiary must be at least 50 percent of the subsidiary’s total assets. Financial holding companies must obtain authorization from the FSC/FSS and may not engage in own business operations except for the purpose of holding subsidiaries.
Other Financial Services Providers
Postal savings and insurance, community credit cooperatives, and other similar enterprises managed or supervised by government or public agencies are exempted from FSS supervision. Moneylenders engage in the business of providing short-term cash and loan services at higher interest rates than rates charged by the commercial banks and other regulated lenders. They fall under FSS supervision if they are registered with two or more municipal administrative authorities or if the aggregate amount of assets from the most recent accounting period exceeds KRW10 billion. In addition to the institution-based supervision of financial services companies that are incorporated and recognized under the law, the FSS carries on function-based supervision of financial services activities whose business boundaries or risk characteristics are not well established. Such activities include foreign currency-related activities, derivatives trading, electronic financial services, and the sale of corporate, individual, and retirement pension products and pension asset management. In addition, non-financial businesses’ securities issuance and distribution, disclosure, and accounting are also supervised, monitored, and audited by the FSC/FSS.
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3 Prudential Supervision
Classification of Business Activities
For supervision purposes, business activities that financial institutions may engage in are classified into primary businesses, secondary businesses, and concurrent businesses.
3.1 BANK BUSINESSES
3.1.1 Primary business
Banking services that banks may provide as primary businesses are stipulated under the Banking Act and the subordinate regulations. They include deposit and withdrawal services, issuance of certain types of securities and debt for funding, bill discounting services, and foreign exchange services.
3.1.2 Secondary business
The secondary businesses of banks are any services that are ancillary to primary businesses. Under the negative list system, banks may provide new secondary services unless specifically prohibited by the law. Secondary services that are listed under the Banking Act or are announced by the FSC pursuant to article 18(3) of the Enforcement Decree of the Banking Act may be provided without reporting to the FSC/FSS; other secondary services must be reported at least seven days in advance.
3.1.3 Concurrent business
Concurrent businesses are non-banking services that banks may provide together with primary and secondary banking services. They include buying and selling of derivatives, treasuries, municipal bonds, investment advisory services, trust services, credit card services, bancassurance, and insurance agency services.
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For classification purposes, concurrent businesses are divided into three categories: Type 1 businesses requiring mandatory reporting to the FSC/FSS when a bank seeks FSC/FSS authorization/approval or registration; Type 2 businesses open to banks under the existing rules and regulations; and Type 3 businesses posing little or no risk to a bank’s safety and soundness such as custodian services for asset securitization and consumer credit information services. In contrast to Type 1 businesses, both Type 2 and Type 3 businesses must be reported to the FSC/FSS at least seven days in advance before a bank conducts the businesses.
3.2 NONBANK BUSINESSES
3.2.1 Mutual savings banks
The businesses of mutual savings banks are largely limited to deposit and loan services that are intended to facilitate micro financing. Unlike banks, mutual savings banks may not engage in concurrent businesses. The primary businesses of mutual savings banks include deposit and loan services, bill discounting services, foreign exchange services, custodian services, intermediary services for government- and public enterprises and financial services firms, issuance of debit- and prepaid card, and payment settlement services. Mutual savings banks may also offer securities broker/dealer services, trust services, and brokerage services for merger and acquisition with authorization/approval from the FSC/FSS as provided for under the Financial Investment Services and Capital Markets Act. Installment financing services are also open to certain qualified mutual savings banks. The secondary businesses include the sale of loans, agency services for the sale of gift certificates and lottery tickets, and bancassurance services. To engage in the secondary businesses, mutual savings banks must obtain authorization/approval from the FSC/FSS.
3.2.2 Specialized credit finance companies
Specialized credit finance companies may engage in any credit finance business that they have obtained authorization/approval for or registered with the FSC/FSS. Credit card business requires authorization/approval while leasing, installment finance, and new technology venture capital businesses necessitate registration. In addition to primary businesses, they may also carry on secondary businesses by utilizing their workforce, assets, and facilities. Those seeking to provide new secondary businesses must report them to the FSC/FSS at least seven days in advance.
The primary business of credit card companies is to issue credit cards, settle payments, and manage member merchants. Leasing companies engage in the business of providing facility leasing and deferred payment sales to business enterprises. As lessors, leasing companies generate rental income by granting
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the lessee a right to use, for a certain period of time, specific property that they own or have paid for. Deferred sale is a method used by leasing companies to deliver specific property to the lessee, which then uses the property with payments in periodic installments. Installment finance companies conclude a sales/purchase agreement for a good or a service with a seller and a buyer, make payment to the seller for the good or the service purchased by the buyer, and receive regular principal and interest payments from the buyer. New technology venture capital companies help technology start-ups raise capital by underwriting debt and equity issues and offering financing to companies with the “venture” designation. Except for new technology venture capital companies, other specialized credit finance companies may also provide loans, bill discounting services, and factoring services.
Concurrent businesses that specialized credit finance companies engage in include insurance agency businesses, electronic financial businesses, collective investment schemes, investment advisory businesses, trust businesses, foreign exchange businesses, and securitization management businesses.
3.2.3 Credit unions
Businesses activities that credit unions may conduct are largely grouped into credit businesses and welfare businesses. Credit businesses cover deposit/savings and loan services, bill discounting, custodian services, and domestic exchange services. While credit unions may carry on businesses secondary to primary credit businesses, they may not engage in concurrent businesses. Under the law, there is no business activity specified as secondary.
Welfare businesses span from mutual aid services to the creation and operation of facilities intended to contribute to the community including social, cultural, and welfare facilities. FSC/FSS authorization/approval must be obtained to provide mutual aid services. Mutual aid services are exempt from the Insurance Business Act.
In addition to a credit union’s members, non-members may also make use of the services that the credit union offer, provided that loans including discounted bills to the non-members and other credit unions’ members combined do not exceed one-third of new loans made in the year.
3.3 FINANCIAL INVESTMENT SERVICES BUSINESSES
3.3.1 Primary businesses
The primary businesses for FISPs are classified into six types based on the function: dealing, brokerage, collective investment schemes, investment advisory services, discretionary investment services, and trust services. As FISCMA adopts the function-based regulatory approach, FISPs may jointly deliver different types of financial investment services irrespective of the function. However, dealing
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and brokerage businesses may not be concurrently conducted with collective investment schemes because of possible conflict of interest.
Dealing
Dealing refers to proprietary buying and selling of a financial investment product through the company’s proprietary account. Dealing also covers issuing or underwriting securities on behalf of an issuer and subscribing to the securities or making offers and accepting bids for the securities. Issuing their own securities and trading financial investment products with other dealers or through brokers are excluded from the scope of dealing.
Brokerage
Brokerage refers to the business of non-proprietary buying and selling of financial investment products through customer accounts. Brokerage services also extend to subscribing to an investment product for a customer or making offers and accepting bids for an investment product. Some cases such as making investment recommendations as an introducing broker are not included in the scope of brokerage.
Collective investment scheme
Collective investment schemes (CIS) pool funds from investors and invest in transferable securities and other financial instruments. CIS operators assume the primary responsibility for investing the pooled assets for the benefit of the investors. Certain cases such as pooling funds from 49 investors or less through a private offering or for the purpose of asset securitization are excluded from CIS.
Investment advisory services
Companies offering investment advisory services engage in the business of providing advice on investment products and investment decisions in respect of such matters as securities to be bought and sold, the methods to be employed, and the timing of the buying and selling. However, giving investment advice to unknown persons en masse or without consideration is not considered as investment advisory services.
Discretionary investment services
Companies providing discretionary investment services make partially or wholly discretionary investment decisions and manage the investments on behalf of customers. However, brokers’ making partially or wholly discretionary investment decisions in the course of processing orders from customers without additional consideration is not deemed as discretionary investment services.
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Trust services
Trust services refer to the business of managing assets of a trust settler for the benefit of the designated beneficiary. However, trust services for certain assets such as secured debentures and copyright are excluded.
Online crowdfunding services
Online crowdfunding services are intermediary services for sale of debt securities, equity securities, or investment contract securities issued by startups via the Internet through other’s accounts. Online crowdfunding services providers should take steps to ensure smooth exchange of information between issuers and investors on the Internet homepage.
3.3.2 Secondary businesses
Because of the negative-list approach that FISCMA takes for the regulation and supervision of financial investment services, there is no business activity specified as secondary. Financial service providers may engage in any businesses that are secondary to their primary businesses unless specifically provided otherwise under the law. To ensure an orderly process for secondary businesses, financial services firms must report to the FSC/FSS seven days in advance a secondary business to be started. The proposed secondary business may be delayed or denied in consideration of the safety and soundness of the company, investor protection, or risks posed to the market.
3.3.3 Concurrent businesses
The range of services that may be offered by financial services companies as concurrent businesses together with primary and secondary businesses vary widely from insurance agency to payment settlement services. For services classified as Type 1 business, regulatory authorization/approval must be obtained. For services classified as Type 2, 3, or 4, the FSC/FSS must be notified of the new business seven days in advance before the start of the concurrent business.
3.3.4 Businesses of financial investment service-related companies
Merchant banks
The primary businesses of merchant banks include short-term financing activities such as buying and selling of short-term notes, facilitating financing for facilities and operating funds, foreign currency-denominated borrowings, foreign investment, debt issuance, and debt guarantee services. As secondary businesses, merchant banks may provide diverse services ranging from cash management account services to factoring, dealing and brokerage of index-linked on-exchange derivatives, commercial real estate rental services, and trading,
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brokerage, arrangement, and agency of certificates of deposit. In addition to primary and secondary businesses, concurrent businesses are also open to merchant banks that have FSC/FSS authorization/approval or registration for the business. Such concurrent businesses cover facility lease services, CIS services, trust services except for money trust, dealing and brokerage of securities, foreign exchanges services, credit information services, and management of securitized assets.
Money brokerage companies
Money brokerage companies provide funding brokerage services for large financial institutions including banks, insurance companies, and securities companies through instruments such as money market products, repurchase agreements, and commercial banks. Money brokerage companies are prohibited from conducting financial investment businesses unless they are closely related to money brokerage services and are authorized or approved by the FSC/FSS. Such businesses include brokerage, arrangement, and agency services of foreign currency-denominated certificates of deposit, repurchase agreements, corporate notes, and over-the-counter derivatives that are based on foreign currencies or interest rates.
Short-term finance companies
Short-term finance companies carry on the business of issuing, discounting, trading, arranging, underwriting, and guaranteeing corporate notes with maturities of up to one year. Companies that are licensed in broker/dealer businesses and engage in corporate note transactions are not considered short-term finance companies.
3.4 INSURANCE BUSINESSES
3.4.1 Primary businesses
The primary businesses for insurance companies are life insurance, nonlife insurance, and hybrid insurance. Whereas life insurance provides benefits to a designated beneficiary upon the death of the insured person (or a similar event) in exchange for regularly paid premium, nonlife insurance gives protection for property losses, personal injuries, and liabilities. Life insurance extends to pension insurance including retirement insurance, while nonlife insurance covers fire insurance, marine insurance, auto insurance, and guaranty insurance. Hybrid insurance covers insurance for injuries, illness, and long-term care. To engage in the insurance business, insurance companies must obtain FSC/FSS authorization/approval for each insurance service they intend to provide.
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With some exceptions, the Insurance Business Act makes it illegal to carry on both life and nonlife insurance businesses because of differences in risks covered by each business and the risk of losses in one insurance business spilling over to the other.
3.4.2 Secondary businesses
In addition to businesses secondary to primary businesses, insurance companies may engage in dealing and brokerage businesses for collective investment schemes. The Insurance Business Act does not specify secondary businesses for insurance companies, but the FSC/FSS must be notified at least seven days in advance before an insurance company begins a secondary business.
3.4.3 Concurrent businesses
Insurance companies may carry on certain noninsurance businesses concurrently with their insurance business, provided that the noninsurance businesses do not undermine the safety and soundness of the insurance companies or harm policyholders. The concurrent businesses for insurance companies include securitized asset custody services, electronic money transfer services, foreign exchange services, and retirement pension funds. Concurrent businesses must be notified to the FSC/FSS at least seven days in advance.
Business Conduct Regulation
3.5 BANKS
The Banking Act specifies restrictions on certain businesses and credit practices. It also prohibits certain activities and limits the amount of credit that may be extended to a single borrower or counterparty for safety and soundness purposes.
3.5.1 Anti-consumer business practices
Internal control for prevention of conflict of interest
Banks must operate with Chinese walls and other internal controls that are designed to identify, evaluate, and prevent any conflict of interest that may arise with their customers. Such systems must be integrated into the bank’s overall internal control system.
Prohibition on tie-in
When making a loan, banks may not demand a tie-in such as a compensating deposit from borrowers and unjustified claim or security interest from borrowers or guarantors when securing third-party collateral or debt guaranty for a loan.
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3.5.2 Prohibitions on investment and lending
Limits on investment in securities
Banks are prohibited from engaging in certain investment activities for safety and soundness purposes. In respect of securities investment, banks must limit their exposure to securities that are susceptible to extreme price volatility or liquidity risks within a reasonable level proportionate to the bank’s capital available to readily meet potential losses. Accordingly, investment in equity securities and other types of securities with maturities of over three years excluding sovereign bonds and monetary stabilization bonds are capped at 100 percent of the bank’s capital.
Property ownership restrictions
Ownership of land and other real properties that are intended for business operations is limited to 60 percent of the bank capital. The limitation is intended as a safeguard against excessive or prolonged exposure to illiquid assets. The 60-percent ownership rule applies to domestic banks, specialized banks, and foreign bank branches. Ownership of real properties for purposes other than business operations is prohibited unless ownership stems from the acquisition of collateral from defaulted borrowers. The disposition of such property, however, must be completed within three years from the date of the acquisition.
Prohibited lending practices
Banks are prohibited from directly or indirectly offering a loan to borrowers with the bank’s shares as collateral, lending to borrowers in exchange for the purchase of the bank’s shares, or providing a loan to the bank’s employees.
3.5.3 Credit extension limits
Credit extension is regulated to mitigate counterparty credit risk and promote a balanced allocation of financial resources. Whereas the term “lending” generally refers to a loan lent to a borrower and a loan guaranty the borrower has made available to the lender for another party, the term “credit extension” refers to a broader range of lender-provided credits. Thus, credit extension includes not only a loan and a loan guaranty, but also other at-risk exposures to the borrower in the form of line of credit, commercial papers, bonds, and other such instruments in addition to any other transactions that obligate a borrower to pay money or its equivalent to lender. Lending was replaced with credit extension in the Banking Act in April 1999 in the wake of the Asian financial crisis as part of a broad banking sector reform aimed at instituting stricter rules and regulations on corporate lending.
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Credit extension to a single counterparty
Credit extension to a single person or a single business may not exceed 20 percent of the bank’s capital, respectively. For Internet banks, they may extend credit up to an amount equivalent to 15 percent of the bank capital to a single person and may not provide credit to businesses except for small- and medium-sized businesses.
Credit extension to a group of counterparties
The limit on credit extension to a single counterparty and other counterparties that share credit risk with the single counterparty—collectively referred to as the “same counterparty”—is set at 25 percent of the bank’s capital. For Internet banks, the maximum credit extension to the same counterparty is limited to 20 percent of the bank capital.
Large credit extensions
Credit extension to a single person, a single business, or the same counterparty exceeding 10 percent of the bank’s capital, respectively, is deemed a large credit extension. The aggregate amount of such large credit extensions must be less than 500 percent of the capital.
Credit extension to large shareholders
Credit extension to each shareholder may not exceed 25 percent of the bank’s capital or an amount equivalent to the shareholder’s equity in the bank, whichever is smaller. In addition, the aggregate amount of credit extended to the bank’s large shareholders may not exceed 25 percent of the bank’s capital. Unlike other banks, Internet banks may not extend credit to their large shareholders.
Credit extension to subsidiaries
Credit extension to each subsidiary of a bank may not exceed an amount equivalent to 10 percent of the bank’s capital. In addition, the aggregate amount of credit extended to the bank’s subsidiaries must be less than 20 percent of the bank’s capital.
Parent-subsidiary credit extension
No credit may be extended by a subsidiary bank to its parent bank. Credit extension to a single subsidiary bank may not exceed 10 percent of the subsidiary bank’s capital, and the aggregate amount of credit extensions from the parent bank to its subsidiary banks may not be greater than 20 percent of the subsidiary banks’ capital.
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Lending to bank employees
Banks may not provide a loan to the employees of its parent bank, subsidiary banks, and other subsidiaries in addition to its own employees except for micro loan that is specified by the FSC/FSS.
3.6 NONBANK FINANCIAL INSTITUTIONS
Each group of nonbank financial institutions—mutual savings banks, specialized credit finance companies, and credit unions—are subject to different sets of restrictions and limitations concerning business activities and credit extensions.
3.6.1 Mutual savings banks
Credit extension limits
Although credit extension limits for mutual savings banks are similar to those for banks in that they are proportionate to the capital, there is an extra layer of limits that are based on the absolute amount of lending for mutual savings banks. For a single counterparty, credit extension may not exceed 20 percent of the mutual savings bank’s capital. An additional limit of KRW10 billion, KRW5 billion, and KRW800 million is applicable where the counterparty is a corporate borrower, a self-employed business owner, and an individual, respectively.
Moreover, the aggregate amount of credit extensions to a same counterparty—a counterparty and any group of connected counterparties—may not exceed 25 percent of the mutual savings bank’s capital. The aggregate amount of large credit extensions—credit extension to a single counterparty exceeding 10 percent of the capital—to a single counterparty must be less than 500 percent of the capital.
Credit extension limits concerning affiliated mutual savings banks
Credit extension limits that mutual savings banks belonging to a business group are specifically required to comply with were instituted in September 2010. For such mutual savings banks, the aggregate of credit extendable to a single counterparty must be less than 20 percent of the parent mutual savings bank’s capital on a consolidated basis. Similarly, the aggregate of credit extendable to a same counterparty—a counterparty and any group of connected counterparties—may not surpass 25 of the parent mutual savings bank’s capital on a consolidated basis. Thus, mutual savings banks affiliated in a business group are required to satisfy credit extension limits on a consolidated basis in addition to those applicable to a single counterparty and a same counterparty as a stand-alone mutual savings bank.
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Other limits on credit extension
Mutual savings banks must also comply with certain requirements when extending credit to individual borrowers and small businesses. For mutual savings banks operating in major metropolitan areas, at least 50 percent of the aggregate credit extended must be made to individual borrowers and small businesses (40 percent for mutual savings banks operating in other areas). Additionally, credit extension for real estate project finances and moneylenders may not exceed 20 percent and 15 percent of the total credit, respectively.
Securities investment
The aggregate amount of securities investment may not exceed 100 percent of the mutual savings bank’s capital. Some limits also apply to individual securities investments including the following:
(a) Stock investments may not exceed 50 percent of the capital;
(b) The aggregate holdings in stocks and bonds of a company may not exceed 20 percent of the capital, and stock holdings must be less than 15 percent of the company’s outstanding shares.
(c) Where the company in subparagraph (b) above is an affiliated company, the aggregate stock- and bond holdings must be less than 5 percent of the capital;
(d) Where the company in subparagraph (b) above is unlisted, the aggregate stock- and bond holdings may not surpass 10 percent of the capital, and stock holdings must be less than 10 percent of the company’s outstanding shares;
(e) The aggregate investments in securities issued by collective investment schemes investing in real estates, special assets, and mixed assets must be within 20 percent of the capital; and
(f) Foreign securities investments must be within 5 percent of the capital.
Some securities are exempt from the above investment limits. Such securities include:
(a) Securities such as treasuries, municipal bonds, and monetary stabilization bonds held for reserve purposes;
(b) Securities equivalent to deposits in accordance with the Depositor Protection Act;
(c) Securities issued by money market funds; and
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(d) Securities obtained as a result of the acquisition of collateral from defaulted borrowers.
Borrowing limits
Mutual savings banks may not borrow funds in excess of an amount equivalent to their capital without FSC/FSS approval. Under regulations, however, approval is deemed to have been granted for borrowings not exceeding 300 percent of the capital. Mutual savings banks may borrow only from financial institutions, the Korea Deposit Insurance Corporation, and the Korea Federation of Savings Banks. Bond issuance is also an option open to them.
Reserve requirements
Mutual savings banks must hold in reserve at least 10 percent of installment deposits and installment savings and 5 percent of other deposits net of the capital in the form of cash, deposits in financial institutions, deposits in the Korea Federation of Savings Banks (80 percent at a minimum), or securities prescribed by the FSC/FSS such as bonds issued by the government or state-affiliated enterprises.
Prohibited business activities
Under the law, mutual savings banks are prohibited from acquiring non-business purpose real estate, providing collateral or guaranty for a loan, extending credit in exchange for the acquisition of the mutual savings bank’s shares or for speculative purposes, or offering money, services, or other pecuniary advantage to large shareholders without justifiable reasons.
Restrictions on transactions with large shareholders
In principle, mutual savings banks may not extend credit to shareholders, executives, and employees who hold more than 2 percent of voting shares and persons specially related with them including family members and relatives. In addition, mutual savings banks that intend to acquire shares issued by large shareholders and their specially related persons in excess of 0.01 percent of the mutual savings bank’s capital or KRW1 billion, whichever is smaller, must obtain approval from all board members in advance, immediately notify it to the FSC/FSS, and disclose it on the Internet homepage. Prior approval from the FSS is also a must where mutual savings banks and their large shareholders sign an agreement to purchase property. Discounting of commercial bills issued by large shareholders is limited to 20 percent of the capital.
In addition, large shareholders of mutual savings banks are expressly prohibited from engaging in the following activities that are not in the interest of mutual savings banks:
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(a) Demanding access to nonpublic information for the purpose of wielding undue influence;
(b) Exerting undue influence over the management or personnel matters of mutual savings banks in collusion with other shareholders in return for consideration such as pecuniary gains;
(c) Demanding mutual savings banks to commit illegal acts; and
(d) Demanding mutual savings banks to engage in non-arm’s length transactions with themselves or a third-party on conditions that are not consistent with conventionally accepted conditions.
3.6.2 Specialized credit finance companies
Because specialized credit finance companies are not deposit-taking institutions and perform only limited credit intermediation functions, they are excluded from credit extension limits for a single counterparty and a same counterparty; they are also excluded from large credit extension rules. In respect of credit extension to a major shareholder of a specialized credit finance company, however, credit extension limit is set at 50 percent of the company’s capital. Ownership of shares issued by large shareholders is also restricted to 150 percent of the capital.
Restrictions on real property acquisition
Specialized credit finance companies are prohibited from acquiring ownership of real properties for purposes other than business operations. Ownership of real properties for business operation purposes is limited to 100 percent of the capital.
Restrictions on leverage ratio
Specialized credit finance companies are subject to leverage restrictions. Leverage ratio—defined as a ratio of aggregate assets to capital—may not exceed 6 (or 600 percent) for credit card companies; that is, aggregate assets may not exceed capital by a factor of 6. For other specialized credit finance companies, the leverage ratio must be less than 10.
Restrictions on secondary businesses of credit card companies
Credit card companies may offer cash advance and loan services to their card members as secondary businesses in addition to their primary businesses of credit card services. As a safeguard to prevent credit card companies from concentrating in cash advance and loan services, rules on the secondary businesses of credit card companies provide that the average amount of receivables from cash advance and loan services per quarter may not be greater than the aggregate of average credit card receivables per quarter and gross debit card purchases per quarter.
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Restrictions on loan businesses of specialized credit finance companies
Receivables generated from lending businesses such as unsecured household loans must be less than 30 percent of the total assets. For calculation, receivables are averaged on a quarterly basis. Credit card assets are excluded.
3.6.3 Credit unions
Credit extension limits
Credit extension to a single counterparty may not surpass the larger of either 20 percent of the capital or 1 percent of the total assets from the previous year’s balance sheet. The maximum amount of credit extension permitted differs depending on the case; where 20 percent of the capital is greater than 1 percent of the total assets, the maximum credit extension is KRW5 billion (for those with capital in excess of KRW50 billion, up to KRW10 billion may be extended to corporate members.); otherwise, it is restricted to KRW700 million. Given the asset structure of credit unions that is heavily concentrated in household loans, there is no limit on credit extension to a same counterparty—a counterparty and any group of connected counterparties—or large credit extension.
Reserve requirements
Credit unions must hold at least 10 percent of the member deposits received in the previous month as redemption reserve, and at least 50 percent of the reserve must be deposited at the national federation and the rest held in the form of cash or deposits at other financial institutions.
Securities investment
Securities investment by credit unions are subject to regulatory restrictions in terms of asset class and maximum investment amount. In respect of asset classes, credit unions may invest in (i) bonds issued by the government and state-affiliated enterprises; (ii) corporate bonds; (iii) money market securities of money market funds as provided by FISCMA; and (iv) notes issued or guaranteed by KDIC-insured financial institutions. Credit unions may invest in corporate bonds up to an amount equivalent to either 30 percent of total assets or 60 percent of the aggregate of securities purchases and deposits placed at the national federation and KDIC-insured financial institutions, whichever is smaller. The maximum investment amount for collective investment securities, beneficiary certificates, and notes issued by or guaranteed by KDIC-insured financial institutions is 100 percent of the capital. Where notes are issued by a single company, the maximum amount must not exceed either 20 percent of the capital or 20 percent of surplus funds (capped at KRW2 billion), whichever is larger.
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Restrictions on real property acquisition
Credit unions may only own real properties intended for business operations in addition to those obtained as a result of foreclosure.
3.7 FINANCIAL INVESTMENT SERVICE PROVIDERS
3.7.1 Common business activities
FISCMA has set forth principles and mechanisms that are specifically designed to address conflict of interest for FISPs. Among them is the assumption and expectation of good faith effort from FISPs to conduct their business fairly and honestly and not to harm investors for their own or another party’s benefit. To this end, FISPs must be able to identify and assess all potential conflict of interest on an ongoing basis and manage them appropriately in accordance with the internal control procedures.
Because of significant potential for conflict of interest that can arise from information exchanges or communications between different financial investment service businesses within a company, FISPs must take the due care to set up information barriers pertaining to the buying and selling of investment products, the ownership of such products, and other material undisclosed information. FISPs must also operate with appropriate Chinese walls to prevent their employees from assuming more than one position in multiple financial investment service businesses. They must also ensure appropriate walls for the use of office spaces and IT equipment and facilities.
3.7.2 Sales and investor solicitation
For investor protection purposes, financial investment service regulation divides investors into retail investors and institutional investors on the basis of their investment purpose, level of investment expertise, and risk appetite with a particular emphasis on protecting retail investors.
Know-your-customer rule
When soliciting a retail investor, the FISP must comply with the so-called “know-your-customer” rule by obtaining certain investor information-such as investment objectives, asset holdings, and previous investment experiences-and maintain records of investor signature and acknowledgement. Information verified by an investor must be immediately shared with the investor.
Principle of suitability
When soliciting a retail investor, the FISP must not offer any investment recommendation that is not suitable to the investor in consideration of the
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investor’s investment objectives, asset holdings, or previous investment experience.
Principle of appropriateness specifically for complex investment products
Before the introduction of the principle of appropriateness, retail investors seeking to invest in complex products without a seller’ solicitation were not protected by law as investor protection measures such as the principle of suitability or duty to explain were applied only in case FISPs solicited retail investors first. To provide minimum protection for such investors, the principle of appropriateness was instituted.
Under the principle of appropriateness, FISPs must promptly inform an investor considering investing in complex products without a seller’ solicitation when they determine that the product is not appropriate for the investor in consideration of the investor’s investment objectives, asset holdings, and previous investment experience and must obtain investor confirmation in writing or through signature or recordings.
Duty to explain (product guidance)
When soliciting a retail investor, the FISP must take the due care to explain investment risk and other specific characteristics of the product it recommends. It must also retain records of investor acknowledgement of the product guidance from the provider. The duty to explain an investment product includes the duty not to make any deliberate omission or misrepresentation about the investment product.
Duty to disclose investor solicitation practices
FISPs must set and disclose to the general public the rules, standards, and procedures with which they must comply when soliciting an investor. In addition, differentiated information must be made available to the public when financial investment service companies solicit retail investors for derivatives and other complex investments.
Introducing broker
FISPs may employ introducing brokers who solicit investors or offer investment advice to investors on behalf of FISPs. Introducing brokers must register with the FSC/FSS. Once registered, they must comply with a set of restrictions and prohibitions that prevent them from entering into a contract on behalf of FISPs or investors, receiving money from investors, brokering money lending, buying and selling financial investment products on commission, and signing an employment agreement with two or more FISPs.
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Other restrictions and prohibitions
FISPs may not use nonpublic information for their own or a third-party’s benefits without justifiable reasons. They may also not compensate for partial or full losses incurred to investors or promise to do so in advance. Offering or promising to offer certain profits to investors is also prohibited as such practices go against the principle that investors must take responsibility for their investments and associated risks. In addition, FISPs must establish and disclose on the Internet homepage their standards and procedures for fee calculation. The standards may not be discriminatory without justifiable reasons. FISPs are also required to immediately deliver contracts and related documents to investors after they sign a contract except where otherwise stated in law. In the case of an investment advice contract, investors are given a 7-day cooling off period to cancel the contract, and the cancellation takes effect immediately when investors send a written notice to FISPs about their intent to cancel the contract.
3.7.3 General broker/dealer requirements
In addition to the common rules and regulations above, FISPs acting as a broker/dealer must observe the following requirements to provide added protection to investors.
Broker/dealer identification
When executing a customer order to buy or sell an investment product, the person handling the order must disclose to the customer whether he or she is a broker or a dealer.
Express customer order
Brokers and dealers must not engage in the buying and selling of investment products through a customer account without receiving an express order to buy or sell from the customer or an agent of the customer.
No abuse of information
Brokers and dealers must not exploit their superior investment and trading information to the detriment of their customers or engage in activities that undermine the integrity of the market.
Notification of settled transaction
When a customer order to buy or sell is executed and settled, brokers and dealers must provide the customer with detailed description of the transaction including the price at which the order was executed and the fees charged within the 20th day of the following month from the date of the settlement.
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Credit extension restrictions
Under FISCMA, credit extension by a dealer or a broker means lending money or securities to investors. On one hand, credit extension provides liquidity to securities markets and facilitate trading. However, it may also encourage speculation and distort markets. So FISCMA and related rules and regulations set out specific standards and procedures for credit extension. For instance, dealers may not lend money or extend other credits to investors with intent to solicit an investor to buy securities within three months after they underwrites the securities.
Segregation of proprietary and customer assets
FISPs are required to segregate their proprietary assets from customer assets at all times. All customer investment securities must be promptly deposited at the Korea Securities Depository.
3.8 INSURANCE COMPANIES
3.8.1 Asset management restrictions
The Insurance Business Act provides detailed rules for insurance companies’ asset management in order to ensure safe and sound asset management to the benefit of policyholders. The general asset management restrictions and requirements for insurance companies are provided below:
(a) Real properties may not be acquired for non-operational purposes;
(b) Credit extension in the form of a loan is prohibited for speculative securities investment or for the acquisition of the shares of the insurance company extending the credit;
(c) Promising assets as collateral or guaranty for a third-party is forbidden;
(d) Credit extension to an individual or an entity (and any connected parties) may not exceed 3 percent of the insurance company’s assets;
(e) The aggregate ownership of equity and debt securities issued by an entity (and any connected parties) may not exceed 7 percent of the insurance company’s assets;
(f) The aggregate amount of credit extended to an individual or an entity and the ownership of equity and debt securities issued by the same individual or entity may not exceed 12 percent of the insurance company’s assets;
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(g) Large credit extension—defined as any amount in excess of 1 percent of the company’s assets—to an individual (and any connected parties), an entity (and any connected parties), or a controlling shareholder of the insurance company may not exceed 20 percent in aggregate;
(h) Credit extensions to a controlling shareholder (an entity) and a subsidiary in aggregate may not exceed 40 percent of the insurance company’s capital. If this amount is greater than the amount equivalent to 2 percent of the insurance company’s assets, the latter is the maximum permitted;
(i) The aggregate amount of equity and debt securities issued by a controlling shareholder (an entity) and a subsidiary may not exceed 60 percent of the insurance company’s capital. If this amount is greater than the amount equivalent to 3 percent of the insurance company’s assets, the latter is the maximum permitted;
(j) Credit extension to a subsidiary (and any connected parties) of the insurance company may not exceed 10 percent of the insurance company’s capital; and
(k) The ownership of real estates must be less than 25 percent of an insurance company’s assets.
3.8.2 Restrictions on dealing with subsidiaries and controlling shareholders
Subsidiary
A company owned by an insurance company in excess of 15 percent of the company’s outstanding shares is deemed a subsidiary of the insurance company. An insurance company that seeks to acquire a subsidiary that engages in financial businesses, credit information businesses, and insurance policy maintenance, cancellation, and amendment businesses must obtain approval from the FSC/FSS. The acquisition of others performing support services to an insurance company such as claims adjustment services providers and insurance agency services providers requires notification to the FSC/FSS.
Credit extension to large shareholders
The Insurance Business Act also provides restrictions on an insurance company’s credit extension to its controlling shareholder—a person holding more than 10 percent of the voting shares or exercising dominant influence on managerial matters—to prevent shareholder abuses. For instance, a vote by the board of directors of an insurance company and a public disclosure are required before credit extension in excess of 0.01 percent of the insurance company’s capital or KRW1 billion—whichever is smaller—is made. The same is required for the acquisition of equity or debt securities issued by a controlling shareholder.
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Non-arm’s length transactions with related parties
The Insurance Business Act prohibits insurance companies from engaging in non-arm’s length transactions with related individuals or entities to prevent risk transfers from their controlling shareholders or subsidiaries. Such transactions include (but are not limited to):
• Credit extension to controlling shareholders or subsidiaries in support of recapitalization in another company;
• Asset transfers without consideration to controlling shareholders or subsidiaries; and
• Any non-arm’s length transaction and credit extensions unequivocally disadvantageous to the insurance company.
3.8.3 Insurance solicitation
Solicitation is the act of soliciting, negotiating, or procuring the purchase of an insurance product from consumers. For consumer protection, the Insurance Business Act limits individuals and entities that may engage in insurance solicitation to the following:
(a) Insurance company executives and employees (excluding the company’s chief executive officer, outside directors, and auditors and members of the audit committee);
(b) Insurance solicitors who are registered with insurance associations and employed by an insurance company; an insurance solicitor must be employed by only one insurance company except where an insurance solicitor employed by a life insurance company solicits a buyer for a nonlife insurance company (and vice versa);
(c) Independent insurance agents (also called insurance agencies) that sell insurance products from multiple insurance companies and conclude an insurance contract on behalf of an insurance company;2 and
(d) Insurance brokers who are FSS-registered independent intermediaries for insurance buyers and sellers; unlike independent insurance agents, insurance brokers may negotiate insurance premiums and contract terms with insurance companies.
2 Bancassurance enabling banks, FISPs, and other authorized financial services companies to sell insurance products as independent insurance agents was introduced in May 2003. The authorized bancassurance sellers may solicit insurance buyers face-to-face at designated places or on the Internet homepage only.
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3.9 MONEYLENDERS
Moneylenders are broadly grouped into private moneylenders providing short-term cash and loan services, collection agencies acquiring debt past due or in default and retrieving delinquent funds, and peer-to-peer lenders providing loan information services and connecting lenders and borrowers on an online platform. Although registration with the FSC/FSS and/or municipal administrative authorities is required, some opt to remain underground. To encourage registration of private moneylenders and reduce underground economic activities, registered moneylenders are permitted to charge higher interest rates than commercial banks and other regulated lenders under the Act on Registration of Credit Business and Protection of Finance Users. As of October 2019, 1,273 moneylenders were registered with the FSC/FSS.
3.9.1 Registration
The following moneylenders must register with the FSC/FSS:
(a) Moneylenders registered with two or more municipal administrative authorities;
(b) Moneylenders that intend to provide debt collection services;
(c) Moneylenders that belong to a business group subject to cross holding restrictions;
(d) Moneylenders whose largest shareholder is a financial institution that provides lending services;
(e) Moneylenders with the aggregate amount of assets from the most recent accounting period in excess of KRW10 billion and the outstanding debt to be collected in excess of KRW5 billion; and
(f) Peer-to-peer lenders.
Other moneylenders must complete registration with the competent municipal administrative authorities. Registration must be renewed every three years to avoid cancellation. Registration requirements by the FSC/FSS differ from those imposed by municipal administrative authorities. For example, the minimum capital required by the FSC/FSS is KRW300 million (KRW5 million for collection agencies) while the minimum capital requirements by municipal administrative authorities are KRW50 million for corporations and KRW10 million for individuals.
3.9.2 Requirements and prohibitions
Matters that are specified in the Act on Registration of Credit Business and Protection of Finance Users must be indicated on contract terms and conditions
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and be notified to borrowers. Matters that are considered specifically important such as lending amount and rate and repayment period must be written in hands. Violation of the requirements may lead to monetary penalty.
Lending amount must not surpass a borrower’s debt-servicing ability considering the borrower’s income and assets. Lending rates—any return that moneylenders receive in exchange for a loan—must not be higher than 24 percent per annum.
3.9.3 Other safeguards for borrowers
Moneylenders with assets greater than KRW50 billion and collection agencies with assets exceeding KRW1 billion are required to appoint a person responsible for establishment of borrower protection plans and compliance with laws and regulations. To ensure sound work ethics, the appointee is prohibited from engaging in regular activities at other for-profit entities. In addition, moneylenders belonging to a business group subject to cross holding restrictions may not extend credit exceeding 100 percent of the capital to shareholders.
Capital Adequacy
3.10 BANKS
The Basel III capital framework for domestic banks began on December 1, 2013. As a result of the implementation of the new capital standards since then, the minimum capital standards and the phase-in arrangements for domestic banks are virtually identical to those put forth by the Basel Committee on Banking Supervision.
In full compliance with the Basel Committee’s stricter capital standards, banking regulations provide that domestic banks’ common equity tier 1 (CET 1) must be at least 4.5 percent of the risk-weighted assets and tier 1 capital 6 percent of the risk-weighted assets. Total regulatory capital, which consists of tier 1 capital and tier 2 capital, must be at least 8 percent of the risk-weighted assets at all times. Capital conservation buffer and countercyclical capital buffer (“CCyB”) were also introduced in January 2016. In addition to the Basel capital standards, banks must set aside 10 percent of the net profit, at a minimum, when they pay dividends to shareholders until its total amount reaches their capital stock.
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Table 1.Basel III Capital Requirements and Phase-in Arrangements(Percent)
2017 2018 2019
CET 1 ratio 4.5 4.5 4.5
Capital conservation buffer 1.25 1.875 2.5
CET 1 plus capital conservation buffer 5.75 6.375 7.0Tier 1 capital 6.0 6.0 6.0
Total regulatory capital 8.0 8.0 8.0
Total regulatory capital plus capital conservation buffer 9.25 9.875 10.5
The domestic systemically important bank (D-SIB) framework was instituted in December 2015. D-SIBs are designated on an annually basis in consideration of 11 indicators including total exposures, assets and liabilities in other financial institutions, assets under custody, outstanding derivatives, and household exposures.
Table 2.Capital Requirements(Percent)
Minimum requirements
Capital conservation
buffer
Countercyclical capital buffer
Non D-SIB D-SIB
CET 1 capital 4.5 7 7-9.5 8-10.5
Tier 1 capital 6 8.5 8.5-11 9.5-12Tier 2 capital 8 10.5 10.5-13 11.5-14
3.11 NONBANK FINANCIAL INSTITUTIONS
Minimum capital requirements became effective for mutual savings banks on December 31, 1998. The minimum capital rules have since been incorporated into the supervisory guidance standards and used for prompt corrective action evaluations. As part of enhanced prudential standards for mutual savings banks, the minimum capital requirement was set to be raised from 5 percent to 7 percent effective July 1, 2014, for mutual savings banks with KRW2 trillion or more in assets at the end the previous accounting period. For those with less than KRW2 trillion in assets, the minimum ratio has been set at 6 percent from July 1, 2014, to June 30, 2016, and to 7 percent effective July 1, 2016. Beginning in January 2018, mutual savings banks with KRW1 trillion or more in assets must comply with the 8 percent minimum capital requirement.
For prompt corrective action, a mutual savings bank with assets in excess of KRW2 trillion is issued a management improvement recommendation (MIR) for minimum capital ratio below 7 percent, a management improvement demand (MID) for minimum capital ratio below 5 percent, and a management improvement order (MIO) for
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minimum capital ratio below 2 percent. Similarly, a mutual savings bank with assets less than KRW2 trillion is issued MIR for minimum capital ratio below 7 percent, MID for minimum capital ratio below 5 percent, and MIO for minimum capital ratio below 2 percent.
A uniform rate of 7 percent minimum capital requirement applies to specialized credit finance companies with the exception of credit card companies to which an 8 percent minimum capital requirement applies. The minimum ratio for credit unions is 2 percent.
3.12 FINANCIAL INVESTMENT SERVICE PROVIDERS
The capital adequacy framework for securities companies was first instituted in April 1997 with the introduction of net operating capital ratio (NOCR). Following the enactment of FISCMA in 2009, it underwent dramatic reform to cover all FISPs including futures companies, asset management companies, and real estate trust companies under the principle of the same regulation for the same business activity. Five years later in 2014, net capital ratio (NCR), a variant of NOCR, was developed to better reflect FISPs’ loss-absorbing capacity and risk exposures on a consolidated basis. With the arrival of NCR, two capital adequacy indicators have come into use to assess the capital standing of FISPs. FISPs that are licensed as brokers and dealers (Tier 1 group) are subject to the NCR requirements and the others excluding Tier 2 group remain subject to the NOCR requirements. Tier 2 group is exempt from both NCR and NOCR requirements given the nature of its business activities. Tier 2 group comprises collective investment services operators, and Tier 3 group companies providing investment advisory services, discretionary investment services, and trust services. FISPs that opted for early NCR adoption became subject to NCR in January 2015 and the others that did not opt for it in the following year. In February 2016, the FSS fine-tuned the criteria used to calculate risk amounts reflecting changes in market conditions including individual interest rate risk amount determination for asset-backed securities and the addition of more qualified foreign credit rating service providers. As a follow-up to the “Plans for the Improvement of Capital Regulation to Facilitate Productive Finance” the FSS took steps to reduce funding cost for small- and medium-sized startups, while raising risk management standards for real estate investment. The FSS also made partial remedial revisions to the risk amount component in the net capital ratio calculation.
3.13 INSURANCE COMPANIES
Risk-based capital (RBC) replaced solvency regime for insurance companies in April 2009 and took effect in April 2011 following a two-year grace period that had been given to ensure a smooth transition to the new capital regime. The Insurance Business Act, the governing legislation for insurance business, has set the minimum RBC ratio of 100 percent. RBC functions as a minimum regulatory capital for insurance companies to
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be determined on the basis of the risks to which an insurance company is exposed. It is expressed as a ratio of available capital to required capital. In principle, available and required capital must be calculated on a consolidated basis excluding non-insurance companies, non-financial entities, and foreign insurance companies if their data consistency, sufficiency, and objectivity are not satisfactory. Where there is no entity to be consolidated, available and required capital may be calculated on a stand-alone basis. For insurance supervision, the RBC ratio provides the basis for the supervisory rating of insurance companies and any follow-up prompt correction action needed.
3.13.1 Available capital Available capital—the numerator of the RBC ratio—is the risk buffer available to cover any unpredicted losses that insurance companies may sustain; it is similar to solvency margin under the solvency margin regime. Available capital is calculated by first aggregating an insurance company’s core capital, which primarily consists of capital stock (paid-in capital and capital surplus), retained earnings, and accumulated other comprehensive income, and supplementary capital such as subordinated debt and loan loss reserves, then deducting from the aggregate capital items including prepaid expenses, deferred acquisition cost, and goodwill, and any capital shortfalls of the insurance company’s subsidiaries. Subordinated debt is deemed as capital to a certain extent; it may be included in tier 2 capital within 50 percent of the capital. A 20-percent haircut is applied per annum where the remaining maturity is five years or less. Subordinated debt must meet strict requirements to be treated as tier 2 capital. For instance, it must be unsecured and non-redeemable without FSS approval and mature at least five years later. Issuance of subordinated debt must be within 400 percent of the net capital as provided by the Commercial Act and 100 percent of the capital. The purpose of the issuance is also limited to avoiding losses caused by maturity mismatch or ensuring financial soundness.
3.13.2 Required capital Required capital—the denominator of the RBC ratio measuring the insurance company’s total risk—is capital calculated from the insurance company’s underlying exposures to insurance risk, interest rate risk, market risk, credit risk, and operational risk considering correlation coefficients.
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Prudential Standards
3.14 BANKS
Banking institutions must comply with certain safety and soundness standards in respect of asset quality, liquidity, and other critical aspect of their banking operations. Banks that fail to meet the expected safety and soundness standards are subject to supervisory actions that range from recapitalization and dividend payout restrictions to prompt corrective action.
3.14.1 Liquidity Coverage Ratio Liquidity is a measure of how well a bank is prepared to convert assets into cash with little or no loss of value in order to meet its liquidity needs in various liquidity scenarios. To help ensure effective bank liquidity supervision, the FSC/FSS has put into effect at the beginning of 2015 the Basel III Liquidity Coverage Ratio (LCR) regime, which replaced the previous won-denominated liquidity ratio requirements that applied to banks. As set by the Basel Committee on Banking Supervision, the LCR is intended to improve the resilience of a bank’s liquidity capacity by requiring high-quality liquid assets sufficient to enable the bank to cope with a “significant stress scenario” lasting up to 30 days. The LCR is defined as a simple ratio of stock of high quality liquid assets to the total net cash outflows over the next 30 calendar days. Commercial banks and specialized banks must maintain a minimum LCR of 100 percent. For foreign bank branches, the minimum LCR is 60 percent. In addition, banks are subject to the net stable funding ratio requirement that supplements the LCR with a time horizon of one year.
3.14.2 Net Stable Funding Ratio Net stable funding ratio (NSFR) is intended to improve long-term resilience by requiring banks to maintain a stable funding profile in regards to on- and off-balance sheet activities. The standard requires the available amount of stable funding to be over the required amount of stable funding. Meeting the NSFR enables banks to maintain sufficient funds to avoid liquidity risk. The NSFR became internationally effective in January 2018. The minimum NSFR requirements for banks excluding the Export-Import Bank of Korea is 100 percent. Internet banks must also comply with the minimum requirement beginning in January 2020.
3.14.3 Foreign exchange management and requirements Banks and other financial institutions that are authorized to engage in foreign exchange-related business activities pursuant to the Foreign Exchange Transactions Act (“foreign exchange-authorized institutions”) are required to systemically and safely manage foreign exchange liquidity and foreign exchange risk.
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The supervisory tools intended to monitor foreign exchange liquidity are foreign currency liquidity coverage ratio, foreign exchange liquidity ratio and stable foreign exchange funding ratio. For the management of foreign exchange risk, open foreign exchange position requirements are in place.
3.14.3 Foreign Currency Liquidity Coverage Ratio The FSC/FSS has been calculating foreign currency liquidity coverage ratio (“foreign currency LCR”) since January 2015 in line with the Basel recommendations and monitoring domestic banks since July of the same year. Later in 2017, the foreign currency LCR regime became mandatory. To help reduce banks’ compliance burden, banks that are subject to foreign currency LCR requirements are exempt from foreign exchange liquidity ratio requirements. The foreign currency LCR, defined as a ratio of the stock of high quality liquid assets denominated in foreign currencies to the total net cash outflows denominated in foreign currencies over the next 30 calendar days, must be 80 percent at a minimum for domestic banks and 60 percent for the Korea Development Bank. The foreign currency LCR requirement does not apply to foreign bank branches, the Export-Import Bank of Korea, and certain banks of which foreign currency-denominated liabilities are less than USD500 million and the foreign currency-denominated liabilities-to-total liabilities ratio is less than 5 percent.
Foreign Exchange Liquidity Ratio
Banks are subject to a three-month foreign exchange liquidity ratio requirement, which is defined as a ratio of foreign currency-denominated assets to foreign currency-denominated liabilities maturing within three months. They must also comply with one-month maturity mismatch ratio (gap ratio) requirements. For foreign-exchange authorized banks, the minimum three-month foreign exchange liquidity ratio is 85 percent. The minimum one-month mismatch ratio—defined as a ratio of net foreign currency-denominated assets (net of foreign currency-denominated liabilities) to aggregate foreign currency-denominated assets—is -10 percent.
Stable Foreign Exchange Funding Ratio
Domestic banks are subject to foreign currency funding ratios relative to the outstanding foreign currency lending that are designed to prevent maturity mismatch between foreign currency borrowing and lending. The stable foreign exchange funding ratio—defined as a ratio of foreign currency funding with maturity longer than a year to foreign currency lending with maturity longer than a year—must exceed 100 percent (excluding the Export-Import Bank of Korea which is subject to the 90 percent requirement). Financial institutions with the outstanding amount of foreign currency lending less than USD50 million are exempt from the stable foreign exchange funding ratio requirement.
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Open Foreign Exchange Position Foreign exchange position refers to the difference between foreign currency-denominated assets and liabilities. For foreign-exchange authorized banks, the limit for aggregate foreign exchange positions (spot and forward positions) is set at 50 percent of the capital. The limit for the net forward position is 40 percent of the capital for foreign exchange-authorized banks and 200 percent for foreign bank branches.
3.14.4 Loan-to-deposit ratio Financial institutions are required to maintain their won-denominated loan-to-deposit ratio on a monthly average basis at or below 100 percent. For calculation purposes, the amount of policy-directed loans is deducted from the loans (the numerator), while the amount of covered bonds is added to the deposits (the denominator).
3.14.5 Asset classification Bank assets are classified into five different classes: (1) normal; (2) precautionary; (3) substandard; (4) doubtful; and (5) presumed loss. Asset classification is made primarily on the basis of the borrower’s debt-servicing ability. It is therefore not only backward-looking (e.g., duration of any nonpayment and the occurrence of any default in the past), but also forward-looking because the borrower’s future debt-servicing ability is assessed and reflected in the classification. Loans classified as substandard, doubtful, or presumed loss are collectively referred to as “substandard or below loans” or SBLs for short. The standard asset classification criteria give the due weight to the borrower’s debt-servicing ability, the duration of any nonpayment from the borrower, and the occurrence of any default.
Table 3.Standard Asset Classification Criteria
Duration of nonpayment of business and household loans
Duration of nonpayment of individual credit card receivables
Normal Shorter than a month; Shorter than a month;
Precautionary More than a month, but shorter than 3 months;
More than a month, but shorter than 3 months;
Substandard More than 3 months (for estimated collectible amount);
More than 3 months (for estimated collectible amount);
DoubtfulMore than 3 months, but shorter than 12 months (in excess of the estimated collectible amount);
More than 3 months, but shorter than 6 months (in excess of the estimated collectible amount);
Presumed lossMore than 12 months (in excess of the estimated collectible amount);
More than 6 months (in excess of the estimated collectible amount);
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3.14.6 Borrower’s debt-servicing ability Asset classification on the basis of the borrower’s debt-servicing ability is made in consideration of the borrower’s debt-paying ability and credit risk factors that include risks to the borrower’s cash flows, business, industry, and financial stability. Nonpayment means interest or principal payment not made before the predetermined date with the lender. Asset classifications made on the basis of the duration of a borrower’s nonpayment of interest or principal is presented in Table 2. Where the borrower’s business is terminated, the borrower’s default becomes final, or the borrower is in bankruptcy proceedings or in the process of business liquidation, the estimated collectible amount from the borrower collateral is classified as “substandard,” and the excess amount not covered by the borrower collateral as “presumed loss.”
Table 4.Asset Classification Criteria
Normal
Debt-servicing ability Duration of nonpayment Default criteria
Assets that are judged to pose little or no risk to full lender collection given the strength of the borrower’s debt-servicing ability in consideration of its overall business soundness, financial conditions, and future cash flows;
- -
Precautionary
Debt-servicing ability Duration of nonpayment Default criteria
Assets that are judged to pose no immediate risk to full lender collection given the borrower’s overall business soundness, financial conditions, and future cash flows, but are susceptible to potential risks that may reduce the borrower’s debt-servicing ability in the future;
Assets whose interest and principal payments from the borrower have been overdue longer than a month, but shorter than three months; -
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Substandard
Debt-servicing ability Duration of nonpayment Default criteria
Assets that are judged to pose significant risks to full lender collection because of the presence of risk factors that may undermine borrower’s future debt-servicing ability;
Portions expected to be collected from assets whose interest and principal payments from the borrower have been overdue longer than three months;
Portions expected to be collected from assets that pose significant risks to full lender collection because of borrower default, bankruptcy, business liquidation, or business termination;
Doubtful
Debt-servicing ability Duration of nonpayment Default criteria
Portions of assets not expected to be collected given the borrower’s sharply deteriorating debt-servicing ability that makes full lender collection unlikely;
Portions not expected to be collected from assets whose interest and principal payments from the borrower have been overdue longer than three months, but shorter than 12 months;
-
Presumed loss
Debt-servicing ability Duration of nonpayment Default criteria
Portions of assets not expected to be collected given the borrower’s sharply deteriorating debt-servicing ability that makes recognition of loan losses unavoidable;
Portions not expected to be collected from assets whose interest and principal payments from the borrower have been overdue longer than 12 months;
Assets that pose significant risks to full lender collection because of borrower default, bankruptcy, business liquidation, or business termination;
3.14.7 Assets subject to classification and allowance for loan losses Asset classification and allowance for loan losses are applicable to all assets that are inherently vulnerable to credit risk and impairment. For banks, this rule applies to loans and credit guarantees under banking account. The same rule applies to assets subject to credit risk and impairment under the trust account.
3.14.8 Minimum allowance for credit loss for banks The FSC/FSS requires banks to provide for estimated credit losses within their loan and other asset portfolios as allowances for loan losses, which are presented on the balance sheet as a contra-asset account. The minimum allowances for the five asset classes are presented in Table 4. The FSC/FSS requires banks to make adjustment to loan loss provisions (“adjustment to loan loss provisions”) based on International Financial Reporting Standards (IFRS) in order to ensure consistency with the regulatory minimum for loan loss allowances.
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Table 5.Minimum Allowances for Bank Credit Losses(percent)
Business loans Household loans Credit cards
Normal 0.85 1.0 1.1
Precautionary 7 10 40
Substandard 20 20 60
Doubtful 50 55 75
Presumed loss 100 100 100
3.15 NONBANK FINANCIAL INSTITUTIONS
The safety and soundness standards for nonbank financial institutions are similar to those for banks. Some standards for nonbank financial institutions are less stringent than those for banks in consideration of their unique service characteristics and business activities.
3.15.1 Asset classification Asset classification for nonbank financial institutions is primarily made on the basis of the borrower’s transaction history, credit rating, the duration of delinquent payment, and any occurrence of default with some adjustments available for the types of businesses of nonbank financial institutions. Unlike the assets of banks, the assets of nonbank financial institutions are not subject to forward-looking criteria. In addition, for project finance loans of mutual savings banks, asset classification must reflect an assessment of the project finance activity as a measure of the likelihood of future loan collection.
Table 6.Asset Classification for Nonbank Financial Institutions
Mutual savings banks
Credit unions
Merchant banks
Specialized credit finance companies
Asset type Loan assets
Loan assets
Loan assets
Loan assetsexcluding household credit
Credit card assets and household credit
Normal Less than one month
Less than one month
Less than one month
Less than one month
Less than one month
Precautionary 1 to 3 months
Less than 3 months
1 to 3 months
1 to 3 months 1 to 3 months
Substandard
More than 3 months(estimated collection amount)
More than 3 months (estimated collection amount)
More than 3 months (estimated collection amount)
More than 3 months (estimated collection amount)
More than 3 months
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Doubtful
More than 3 months (excess of estimated collection amount)
3 to 12 months (excess of estimated collection amount)
3 to 12 months (excess of estimatedcollection amount)
More than 3 months (excess of estimated collection amount)
3 to 6 months
Presumed loss
More than 12 months (no estimated collection)
More than 12 months (excess of estimated collection amount)
More than 12 months (excess of estimated collection amount)
More than 3 months (no estimatedcollection)
More than 6 months
3.15.2 Minimum allowances for credit losses Nonbank financial institutions must comply with minimum allowance rules for credit losses by setting aside allowances for credit losses on the basis of asset classifications made.
Table 7.Minimum Allowances for Credit Losses of Nonbank Financial Institutions(Percent)
Normal Precautionary Substandard Doubtful Presumed loss
Mutual savings banks 1.0 10.0 20.0 55.0 100.0
Credit unions 1.0 10.0 20.0 55.0 100.0
Merchant banks 0.5 2 20.0 50.0 100.0
Specialized credit finance companies
Household loans 1.0 10.0 20.0 75.0 100.0
Installment finance receivables
1.0 10.0 20.0 75.0 100.0
Credit card receivables 1.1 40.0 60.0 75.0 100.0
Credit card loans 2.5 50.0 65.0 75.0 100.0
Others 0.5 1.0 20.0 75.0 100.0
3.15.3 Credit extension limits Nonbank financial institutions are subject to credit extension limits on any single counterparty (borrower) and any connected or related counterparties as banks are. Credit extension in excess of 10 percent of the capital to a counterparty and any connected counterparties (a counterparty for the mutual savings bank) is deemed large.
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Table 8.Credit Extension Limits for Nonbank Financial Institutions
Mutual savings banks Credit unions Merchant banks
Specialized credit finance
companies
Single counterparty
Less than 20% of capital;
- For an entity: KRW10 billion;
- For a sole proprietor: KRW5 billion;
- For an individual: KRW800 million;
Greater of either 20% of
capital or 1% of assets;
20% of capital; -
Counterparty and any connected counterparties
25% ofcapital; - 20% of capital; -
Large credit extension
500% of capital; - 500% of
capital; -
Credit extension to a major shareholder and any specially related person
No credit extension permitted;
-
Lesser of either 15% of capital or the ratio of capital contribution;
50% of capital;
3.15.4 Prudential guidance ratios Nonbank financial institutions must comply with safety and soundness guidance ratio requirements that the FSC/FSS has set for prudential regulation and supervision purposes. The ratios for nonbank financial institutions are similar for those for banks.
Table 9.Prudential Guidance Ratios for Nonbank Financial Institutions
Mutual savings banks
Credit unions
Merchant banks
Specialized credit finance companies
Minimum capital ratio 7%3 Net worth
ratio of 2% 8%
Adjusted capital ratio of 7%
(8% for credit card companies)
3 The minimum capital ratio required for mutual savings banks with assets of KRW1 trillion or greater was set at 8 percent in January 2018.
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Minimum won-denominated liquidity ratio
100% - 100% 100%
Minimum foreign currency-denominated liquidity ratio
- - 80% 80%
Maximum won-denominated loan-to-deposit ratio
100% 100% - -
Maximum ratio of delinquent loans (more than a month)
- - -10%
(credit card companies only)
Minimum loan loss provision ratio 100% 100% - -
3.16 FINANCIAL INVESTMENT SERVICE PROVIDERS
Financial services firms that are licensed to offer financial investment services as a FISP must comply with prudential guidance standards set by the FSC/FSS in respect of capital adequacy, asset soundness, risk management, and foreign currency assets and liabilities. FISPs that fail to satisfy the required prudential guidance standards are subject to supervisory actions ranging from recapitalization to restrictions on dividend payouts.
3.16.1 Asset classification FISPs must classify assets exposed to credit risk and impairment on a quarterly basis into one of the five asset classifications: normal, precautionary, substandard, doubtful, and presumed loss. They must also set aside allowances for credit losses accordingly. Standard requirements for credit loss allowances are 0.5 percent for normal assets, 2 percent for precautionary assets, 30 percent for substandard assets, 75 percent for doubtful assets, and 100 percent for assets classified as presumed loss.
3.16.2 Risk management FISPs must establish effective risk management systems that can identify, evaluate, monitor, and control risks inherent in or associated with financial investment services. They must also set risk limits and trading limits on an integrated basis for all trading desks, transactions, or financial investment products and services. In addition, they must establish an internal risk management guideline that sets forth NOCR/NCR levels and asset-liability ratio that are to be maintained internally, criteria and limits for high-risk assets, and the composition and operation of a risk management unit. The establishment and revision of the internal risk management guideline must be reported to the FSS.
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3.16.3 Soundness of foreign currency-denominated assets and liabilities FISPs that engage in foreign exchange businesses must comply with spot and forward position limits, liquidity requirements, and maturity mismatch rules that largely correspond to those applied to banks that are authorized to conduct foreign currency transactions.
3.16.4 Restrictions on transactions with a large shareholder Unless authorized otherwise, no FISP may engage in any of the following activities:
(a) Acquiring securities issued by a large shareholder;
(b) Acquiring equity and debt securities or notes issued by an affiliate in excess of 8 percent of the FISP’s capital;
(c) Non-arm’s length transaction with a large shareholder or any related party; and
(d) Any activity or arrangement designed to circumvent the aforementioned restrictions from (a) to (c).
In addition, FISPs may not extend credit to a large shareholder—including any entity and individual specially related to the shareholder—unless such credit extension poses no material risk to their safety and soundness.
3.17 INSURANCE COMPANIES
Prudential supervision tools for insurance companies include regulatory limits such as credit extension limits and investment limits, the asset classification framework, the solvency margin and prompt corrective action regime, and supervisory evaluation and rating.
The supervisory evaluation and rating regime was changed from CAMEL to RAAS—short for risk assessment and application system—in September 2012 for transition to risk-based supervisory evaluation and rating. Under RAAS, each insurance company receives a composite rating from the FSS on the basis of evaluation and rating of seven components of the insurance company’s overall financial soundness and business operations.
The seven components are: (1) management risk; (2) insurance risk; (3) interest rate risk; (4) investment risk; (5) liquidity risk; (6) capital adequacy; and (7) earnings. For each of the seven components, quantitative and non-quantitative factors comprising the component are analyzed for a component rating on a 1 to 5 numerical scale (1 the highest rating and 5 the lowest). The component ratings are then aggregated for the insurance company’s composite rating on a 1 to 5 numerical scale with three levels (+, 0, or -) for each numerical scale, meaning a total of 15 possible level assignments.
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Composite rating is used as the basis for prompt corrective action, which can vary from MIR and MID to MIO. MIR is the least adverse supervisory action and MIO the most adverse. MIR is issued when (1) the composite rating is 3, 2, or 1, and (2) the capital adequacy component rating is 4 or 5, or at least two of the ratings for insurance risk, interest rate risk, and investment risk are 4 or 5. MIO is made for insurance companies that are assigned a composite rating of 4 or 5.
The asset classification framework is intended to help insurance companies manage distressed assets in a more systematic manner and promote sound asset management. Assets are classified into five classes—normal, precautionary, substandard, doubtful, presumed loss—in consideration of borrowers’ debt-servicing ability and history of financial transactions. Although the general asset classification criteria are set forth under the Regulation on Supervision of Insurance Business, insurance companies should establish their own criteria in detail. The asset classification framework applies to any assets that are exposed to credit risk such as loans, securities, and insurance receivables. Insurance companies’ asset classification status is considered in the evaluation of investment risk under RAAS as well as in the calculation of solvency margin and credit loss allowances.
Supervisory Review of Financial Products and Services
3.18 REPORTING AND DISCLOSURE REQUIREMENTS FOR BANKS
Banks are required to report in advance to the FSC/FSS new contract terms and conditions or alterations to existing provisions for financial products and services for supervisory review of their appropriateness and fairness to consumers. Contractual terms and conditions that do not disadvantage or harm consumers, however, may be reported ex-post within ten days of the change. Supervisory action may ensue for new provisions or alterations that fall short of the expected standards.
New contract provisions and alterations subject to reporting for supervisory review include the following:
• Contract terms and conditions that are aimed at circumventing the bank’s legal liabilities stemming from negligence;
• Contract terms and conditions that arbitrarily limit the scope of damages to the counterparty or assign the bank’s liabilities to the counterparty without justifiable cause;
• Contract terms and conditions that impose excessive penalty for delayed payment or otherwise improperly demand damages from the counterparty; and
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• Contract terms and conditions that arbitrarily exclude consumer claims or violate consumer rights that are protected under the law.
Banks must also comply with the duty to provide ex-ante disclosures that are material to consumer benefits such as alterations affecting interest rates charged, termination of contracts in effect, and deposit protection.
3.19 REPORTING AND DISCLOSURE REQUIREMENTS FOR NONBANKS
Specialized credit finance companies that set new standard contract provisions or make alterations to existing provisions for financial products and services must file an advance report with the FSC/FSS and disclose them on the Internet homepage. Similar reporting is required for contract provision changes sought by the Korean Federation of Savings Banks and the Credit Finance Association of Korea. Ex-post reporting within ten days of the change may be allowed in case (i) alterations to existing provisions do not affect the rights and obligations of financial consumers; (ii) standard provisions are utilized; (iii) terms and conditions are identical to those already reported by other mutual savings banks and specialized credit finance companies; and (iv) terms and conditions are revised in accordance with FSC/FSS demand.4 Supervisory action may be taken for changes that are contrary to consumer interest.
3.20 REPORTING AND DISCLOSURE REQUIREMENTS FOR FINANCIAL INVESTMENT SERVICE PROVIDERS
Before the amendment of the Financial Investment Services and Capital Markets Act in 2018, financial investment service providers had to report to the FSC/FSS in advance the enactment and revision of standard contract provisions. However, under the amended Act, they may report it ex-post to the FSC/FSS and the Korea Financial Investment Association, the self-regulatory organization for the securities and investment industries, within seven days of the change taking place. Where the enactment or revision of standard contract provisions could have a material impact on consumer rights or obligations, it should be reported to the FSC/FSS in an ex-ante manner.
The Korea Financial Investment Association may set the standard contract provisions for investment products for its member firms in order to help prevent unfair contract terms and conditions from being circulated and ensure an orderly market. It should file an advance report to the FSC/FSS if it intends to establish or revise standard contract provisions unless the provisions are for the use of professional investors. Supervisory action may be taken for changes that seem contrary to investor interest.
4 The FSC/FSS may demand a change in standard provisions and financial terms and conditions if they are not in compliance with laws and regulations or if they could undermine the benefits of financial consumers.
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3.21 SUPERVISORY REVIEW OF INSURANCE PRODUCTS AND SERVICES
Insurance products consist of a set of basic documents such as an insurance policy, a business operations manual, and a document on the calculation on insurance premium and policy reserves. If insurance companies draw up or revise basic documents in compliance with relevant statutory standards concerning the creation and revision of basic documents, they may offer them without pre-supervisory review (“discretionary insurance product”). However, if the new or revised product is subject to mandatory reporting for supervisory review (“nondiscretionary insurance product”), insurance companies must report it and submit documentation to the FSC/FSS at least 30 days prior to the expected date of the sale.
Supervisory review of an insurance product consists of an ex-post after-sale review for discretionary insurance products and an ex-ante pre-sale review for nondiscretionary insurance products. Discretionary insurance products may be offered to consumers without FSS supervisory review in principle. However, to mitigate the risk of consumer harm from discretionary insurance products, the FSS conducts an ex-post supervisory review on a quarterly basis to identify and focus on defective discretionary insurance products. Under this intensive review regime, insurance companies must submit a list of insurance products sold during a quarter until the last day of the following month from the end of each quarter.
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4 Supervisory Evaluation and Rating
Supervisory Evaluation
The FSS evaluates financial institutions’ business operation and health and assigns an overall rating. Supervisory rating was first introduced for banks in October 1996 following Korea’s membership in the OECD and the Bank for International Settlements. The rating regime was soon expanded to other types of financial institutions. It took effect for securities companies in January 1999, insurance companies and specialized credit finance companies in January 2000, mutual savings banks and specialized banks in July and August, respectively, of 2000, and FHCs in December 2000.
4.1 COMMERCIAL BANKS AND FOREIGN BANK BRANCHES
For the evaluation and rating of commercial banks and their operations in foreign countries, the FSS replaced CAMELS (Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk) with CAMEL-R for risk management beginning in the fourth quarter of 2012 (Table 10). The evaluation of each of the six components is based on a combination of quantitative and non-quantitative factors. (Ratings for the management and risk management components are assigned using only non-quantitative metrics.) For the evaluation and rating of domestic banks’ overseas banking operations and foreign bank branches, ROCA—short for Risk management, Operational control, Compliance, and Asset quality—is employed. Supervisory rating for internet banks has been suspended until the end of 2018 pursuant to article 102 of the Regulation of Supervision of Banking Business but is set to resume in 2020.
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4.2 SPECIALIZED BANKS
The supervisory rating for each of the five specialized banks is assigned on the basis of the evaluation of six components: capital adequacy, asset quality, compliance, risk management, earnings, and liquidity or CACREL. For the evaluation of the earnings component of the Korea Development Bank and the Industrial Bank of Korea, only non-quantitative metrics are used. Similarly, the earnings component is excluded for the rating of the Export-Import Bank of Korea; in respect of liquidity, the Export-Import Bank of Korea is also not subject to liquidity coverage ratio rules that are applicable to commercial banks. In addition, the foreign branch operations of the specialized banks are evaluated on the basis of asset quality, compliance, and risk management only.
4.3 NONBANK FINANCIAL INSTITUTIONS
For the evaluation and rating of nonbank financial institutions, the five components of CAMEL—Capital adequacy, Asset quality, Management, Earnings, and Liquidity—are used.
4.4 FINANCIAL INVESTMENT SERVICE PROVIDERS
A newly revised common supervisory rating system for FISPs took effect in April 2009 after FISCMA took effect on February 4, 2009. The revised common rating system divides the evaluation criteria into common evaluation and business-specific evaluation. The common evaluation criteria comprise capital adequacy, earnings, and internal controls and account for 60 percent of the supervisory evaluation and rating. On the other hand, the business-specific criteria, which account for 40 percent of the supervisory evaluation and rating, comprise components that vary with the type of financial investment service business. Thus, for brokers and dealers, the evaluation components are liquidity and stability. Similarly, for real estate trust services providers, the other components are liquidity and asset soundness. For financial firms that engage in multiple financial investment service businesses, varying weights are assigned on the basis of the earnings from each business. Supervisory rating of FISPs was terminated in April 2015 with the determination that the unique business characteristics of FISPs including their limited proprietary assets do not warrant periodic supervisory evaluation and rating.
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Table 10.Rating Components and Evaluation Factors
Component Quantitative evaluation factors Non-quantitative evaluation factors Assigned
weight
Capitaladequacy
•Total capital ratio;•Tier 1 capital ratio;•Common equity tier 1 •ratio; Leverage ratio;
•Compliance with supervisory guidelines; Capital adequacy taking into account risk characteristics and magnitudes; Adequacy of the composition of capital, the likelihood of future capital impairment; Management’s approach to preserving capital soundness;
20%
Assetquality
•Ratio of loans with increased risk of losses;•Ratio of loans classified
as substandard or below (SBLs); Ratio of loans with delinquent payment;•Loan loss provision ratio;•Seasonally adjusted
delinquency rate;
•Appropriateness of credit risks management; Identification, measurement, and assessment of credit risks; Appropriateness of credit extension policy; Appropriateness of asset classification practices; Adequacy of allowances for loan and other credit loss; Appropriateness of loan management; Identification and management of problematic loans;
25%
Management
-
•Soundness of governance structure;•Appropriateness of management
policy formulation and implementation; Appropriateness of performance-based remuneration;•Assessment of business efficiency
and improvement plans;•Assessment of internal controls
and other operational aspects of business; Compliance with laws and regulations and remedial measures recommended by supervisors following an examination; Compliance with corporate social responsibility (CSR);
15%
Earnings •Return on assets;•Cost-asset ratio;•Cost-income ratio;•Risk-adjusted return on
equity;
•Risks to the size and components of earnings; Appropriateness of earnings structure; Appropriateness of expense structure;•Business effectiveness and capacity
to generate future earnings;
10%
Liquidity •Liquidity coverage ratio;•Foreign exchange liquidity
ratio; Won-denominated loan-to-deposit ratio;•Stable foreign exchange
funding ratio;
•Appropriateness of liquidity risk management; Volatility variables and factors for liquidity;•Appropriateness of funding structure
and operation; Stress test operation and management;
15%
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Risk management
-
•Appropriateness of risk governance structure and policy management;•Status of risk management
processes and controls;•Appropriateness of risk
identification, measurement, and evaluation;
15%
4.5 INSURANCE COMPANIES
The supervisory evaluation and rating regime was changed from CAMEL to RAAS—short for risk assessment and application system—in September 2012 for transition to risk-based supervisory evaluation and rating. Under RAAS, each insurance company receives from the FSS a composite rating on the basis of evaluation and rating of seven components of the insurance company’s overall financial soundness and business operations.
The seven components are: (1) management risk; (2) insurance risk; (3) interest rate risk; (4) investment risk; (5) liquidity risk; (6) capital adequacy; and (7) earnings. For each of the seven components, quantitative and non-quantitative factors comprising the component are analyzed for a component rating on a 1 to 5 numerical scale (1 the highest rating and 5 the lowest). The component ratings are then aggregated for the insurance company’s composite rating on a 1 to 5 numerical scale with three levels (+, 0, or -) for each numerical scale, meaning a total of 15 possible level assignments.
Composite rating is used as the basis for prompt corrective action, which can vary from MIR and MID to MIO. MIR is the least adverse supervisory action and MIO the most adverse. MIR is issued when (1) the composite rating is 3, 2, or 1, and (2) the capital adequacy component rating is 4 or 5, or at least two of the ratings for insurance risk, interest rate risk, and investment risk are 4 or 5. MIO is made for insurance companies that are assigned a composite rating of 4 or 5.
4.6 FINANCIAL HOLDING COMPANIES
In January 2008, LOPECM—short for lead subsidiary, other subsidiary, parent company, consolidated earnings, capital adequacy, and management—which had been used for FHCs, was replaced by RFI (risk management, financial condition, and impact).
Component and Composite Ratings
Component rating is determined on the basis of the evaluation of quantitative and non-quantitative evaluation factors. The quantitative and non-quantitative evaluation factors are aggregated to generate the component rating. The component ratings are then aggregated using varying weights to determine a preliminary composite rating (5 possible ratings, 15 possible levels). The final composite rating is assigned following a
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full evaluation of the institution’s overall business conditions and capability, supervision issues and concerns, assessment of results from off-site monitoring and ongoing supervision, market conditions, and other relevant factors not fully captured in the preliminary composite rating (5 possible ratings, 15 possible levels).
As a general rule, supervisory evaluation and rating takes place when the FSS conducts a full-scope examination. In addition, the FSS conducts CAEL evaluation—capital adequacy, asset quality, earnings, and liquidity—of financial firms on the basis of the filings of Business Report that financial firms are required to periodically provide to the FSC/FSS.5
4.7 ADJUSTMENT TO COMPOSITE RATING
The composite rating may be adjusted following the quarterly CAEL composite rating in accordance with the criteria established in the supervisory regulations. Under the rules, rating adjustment may be made when:
(a) The quarterly CAEL composite rating of quantitative factors drops by more than two or more ratings from the institution’s most recent composite rating;
(b) The quarterly CAEL composite rating of quantitative factors deteriorates for two consecutive quarters from the institution’s most recent composite rating;
(c) An institution is assigned a composite rating of 1, 2, or 3, but the capital adequacy or the asset quality component of the quarterly CAEL composite rating is assigned a rating of 4 or 5; or
(d) The FSS makes the judgment that rating adjustment is necessary because of the institution’s worsening business conditions, heightened risk of asset deterioration, or other difficulties.
4.8 PROMPT CORRECTIVE ACTION
Prompt corrective action is a remedial measure taken after the FSC/FSS makes the determination that a financial services firm demonstrates heightened risk of stress or failure primarily on the basis of the evaluation of its capital adequacy and the result of supervisory rating. The supervisory rating the FSS assigns to an institution becomes the basis for prompt corrective action, which may vary from MIR and MID to MIO. For a bank, MIR may be issued when (1) the composite rating is 3 or better, and (2) the rating for capital adequacy or asset quality is 4 or 5. For an insurance company, MIR may be issued when (1) the composite rating is 3 or better, and (2) either the rating for the capital adequacy component or the ratings for two of the insurance risk, interest rate risk, and investment risk components are 4 or worse. For securities companies,
5 Unless exempted otherwise, publicly traded companies including financial service providers are required to make available regular regulatory filings known as the Business Report with the FSC/FSS; it is filed for the first and the third quarters of the accounting year (Quarterly Report), for the first six months of the year (Semiannual Report), and for the year (Annual Report).
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MIR may be made when the rating for the capital adequacy component is 4 or worse. MID is issued when a bank, a securities company, or an insurance company is assigned a composite rating of 4 or worse, while MIO is limited to a failing financial institution.
Table 11.Commercial Bank Component and Composite Ratings
Ratings Strong Satisfactory Less than satisfactory Deficient Critically
deficient
Capital adequacy
• Capital level strong relative to risks, well above industry average;
• Capital level satisfactory relative to risks, worse than strong;
• Capital level insufficient relative to risks or asset risks, below industry average;
• Capital level deficient relative to risks;
• Capital support from external sources needed;
• Capital level critically deficient relative to risks;
• Viability uncertain;
• Immediate capital support from external sources needed;
Assetquality
• Strong asset quality and credit practices;
• Minimal risk;
• Minimal supervisory concern;
• Satisfactory asset quality and credit practices;
• Modest level of supervisory attention needed;
• Less-than-satisfactory asset quality;
• Trends indicative of asset quality deterioration or risk exposures;
• Improvement needed in credit practice and risk management;
• Higher level of supervisory concern than before;
• Deficient asset quality;
• Levels of risk and deteriorating assets significant and poorly controlled;
• Institution’s viability uncertain if left unchecked;
• Critically deficient asset quality;
• Institution’s viability questionable;
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Management • Strong performance by management and board of directors;
• Management and the board amply capable of addressing existing and potential risks and problems;
• Satisfactory performance by management and the board of directors;
• Management and the board effectively addressing weaknesses and risks;
• Less-than-satisfactory performance by management and the board of directors;
• Improvement needed in risk management practices;
• Insufficient response to the institution’s problems, risks, and conditions;
• Deficient management and board performance;
• Inadequate risk management;
• Strengthening or replacing management or the board may be necessary;
• Critically deficient management and board performance; strengthening or replacing management or the board is necessary;
Earnings • Strong earnings;
• Earnings more than sufficient to support banking operations and maintain high capital and allowance levels;
• Satisfactory earnings;
• Earnings above industry average and sufficient to support banking operations and maintain high capital and allowance levels;
• Recent earnings experiencing slight decline;
• Less-than-satisfactory earnings;
• Earnings fluctuating and unsustainable, insufficient to fully support banking operations and maintain high capital and allowance levels;
• Deficient earnings;
• Earnings erratic, fluctuating, experiencing substantive drops, and insufficient to support banking operations and maintain high capital and allowance levels;
• Critically deficient earnings;
• Losses and capital erosion a serious threat to the institution’s viability;
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Liquidity • Strong liquidity levels and fund management practices;
• Reliable access to fund sources to meet present and anticipated liquidity needs;
• Satisfactory liquidity levels and fund management practices;
• Slight decline in liquidity, increased reliance on external funds; Modest weaknesses in fund management practices;
• Liquidity levels or fund management practices in need of improvement;
• Insufficient liquid assets or increased reliance on interest rate-sensitive funds;
• Unable to secure funds at competitive terms;
• Evidence of material weaknesses in fund management practices;
• Deficient liquidity levels or inadequate fund management practices;
• Unable to secure ample funds at competitive terms;
• Critically deficient liquidity levels and fund management practices;
• Immediate external support needed to meet maturing obligations or other liquidity needs;
• Viability of the institution threatened;
Risk management
• Strong risk management;
• Minimal risk levels;
• Effective risk management systems for identifying, measuring, monitoring, and controlling risk;
• Satisfactory risk management;
• Risk levels under control;
• Some weaknesses in risk management but well controlled by management;
• Material risk levels likely to adversely affect capital and earnings;
• Deficiencies in risk management;
• Material risk levels threatening earnings and capital;
• Significant default risk;
• Risk management system too deficient to effectively identify, measure, monitor, and control risk;
• Significant risk levels threatening the institution’s viability;
• Wholly inadequate risk management practices;
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Composite rating
• Institution sound in nearly all aspects;
• No matters of supervisory concern;
• Minor weaknesses but can be addressed in an ordinary, routine manner;
• Not susceptible to vagaries of business conditions or financial markets;
• Strong management performance and risk management;
• Institution fundamentally sound;
• Moderate weaknesses present, but well within the capabilities of the management or minimal supervisory action;
• Institution generally stable and capable of withstanding business fluctuations;
• Broadly satisfactory risk management;
• Institution exhibiting a degree of supervisory concern in financial conditions, management performance, and compliance;
• Institution in need of more than routine supervisory concern;
• Institution less capable of withstanding business fluctuations and more vulnerable to external developments and conditions than institutions with composite rating of 1 or 2;
• Failure unlikely in consideration of the institution’s overall business and financial conditions;
• Institution exhibiting generally deteriorating financial conditions;
•Wide-ranging and serious financial and management deficiencies requiring close supervisory attention;
• Institution not likely to withstand business fluctuations;
• Failure a distinct possibility;
• Unacceptable risk management practices;
• Institution exhibiting alarmingly deteriorating financial conditions, and failure highly probable;
• Significant risk to deposits;
• Immediate external support required to remain viable;
• Greatest supervisory concern in need of immediate supervisory action;
• Severity of risks and other problems beyond the ability or willingness of the management to address or control;
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Table 12.Capital Adequacy and Prompt Corrective Action
Prompt corrective action
Capital adequacy MIR MID MIO
Banks and bank holding companies
BIS capital adequacy ratio < 8% < 6% < 2%
Tier 1 capital ratio < 6% < 4.5% < 1.5%
CET 1 capital ratio < 4.5% < 3.5% < 1.2%
Nonbank financial holding companies
Capital relative to required capital < 100% < 75% < 25%
Financial investment service providers
Net capital ratio < 100% < 50% < 0%
Net operating capital ratio < 150% < 120% < 100%
Insurance companies Risk-based capital ratio < 100% < 50% < 0%
Merchant banks Capital ratio < 8% < 6% < 2%
Mutual savings banks Capital ratio < 7% < 5% < 2%
Specialized credit finance companies Adjusted capital ratio < 7% < 4% < 1%
Credit card companies Adjusted capital ratio < 8% < 6% < 2%
Table 13.Supervisory Rating and Prompt Corrective Action
Supervisory rating MIR MID MIO
Financial holding companies
• Composite rating of 3 and component rating of 4 or 5 for either financial condition or capital adequacy component;
• Composite rating of 4 or 5;
-
Specialized credit finance companies
• Composite rating of 4 and component rating of 3 or better for either capital adequacy or asset quality component;
• Composite rating of 4 and component rating of 4 or 5 for either capital adequacy or asset quality;
• Composite rating of 5;
Credit card companies
• Composite rating of 3 or better and component rating of 4 or 5 for either capital adequacy or asset quality component;
• Composite rating of 4 or 5;
-
Others • Composite rating of 3 and component rating of 4 or 5 for either capital adequacy or asset quality component;
• Composite rating of 4 or 5;
-
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Table 14.Remedial Actions under Prompt Corrective Action
MIR MID MIO
Potential supervisory actions
• Operational improvement in organization and personnel;
• Capital increase or write-off;
• Restrictions on expansion into new businesses;
• Branch closings and restrictions on new branch openings;
• Dismissal of company officers;
• Partial suspension of business operations;
• Retirement of company stocks;
• Appointment of outside administrator;
• Merger;
Execution of business improvement plan
• MID triggered if business improvement plan rejected or incompletely executed;
• MIO triggered if business improvement plan rejected or incompletely executed;
• Delicensing and business closure if business improvement plan rejected or incompletely executed;;
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5 Examination
Examination Process
The FSS examines financial institutions pursuant to authority conferred by article 37 of the AEFSC and other financial statutes. FSS examiners perform full-scope and targeted examinations of financial institutions to help ensure appropriate safety and soundness standards and enforce compliance with laws and regulations.
FSS examiners conduct full-scope examination to evaluate financial institutions’ overall financial, management, operational, and compliance performance. The selection of financial institutions that are to undergo a full-scope examination is made in advance during the annual examination planning. The determination of the timing and duration of a full-scope examination and the number of examiners to be assigned is normally made with due consideration given to the size, the complexity, and the risk profiles of the subject institution, findings from the previous examination, and issues of supervisory concerns that have been raised from off-site monitoring.
A targeted examination is limited in scope and is intended to address a narrow range of supervision matters and concerns such as incidents of irregularity and unsound business activity.
Off-site monitoring also constitutes an important component of financial institution examination that complements on-site examination. For normal off-site monitoring, FSS examiners analyze financial and operational reporting from financial institutions, evaluates quantitative safety and soundness measures, and work to identify areas of weaknesses and risks in need of supervision action. If necessary, FSS examiners conduct an on-site inspection and meet with the subject institution’s senior executives to address issues of supervisory concern.
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5.1 OFF-SITE MONITORING
FSS examiners conduct off-site monitoring on an ongoing basis to help identify and address financial institutions’ areas of weakness, deficiency, vulnerability, and risk. Off-site monitoring usually involves analyzing financial and operational reporting from financial institutions, evaluating quantitative safety and soundness measures, and addressing issues of supervisory concern. For data collection and analysis, FSS examiners make use of wide-ranging sources such as Business Report filings that financial institutions submit regularly to the FSC/FSS, internal reports, and meetings with senior executives and employees. Impact analysis of the subject institution’s business strategy on its risk profiles is also carried out as routine part of off-site monitoring. Various IT support systems also facilitate off-site monitoring. When deemed necessary, FSS examiners also visit the subject institution in person to obtain additional information on unusual activities or areas of supervisory concern.
The findings of off-site monitoring often form the basis for on-site examination and other supervisory actions. The relationship manager assigned to each financial institution also participates in the off-site monitoring.
5.2 PRE-EXAMINATION PREPARATION
Planning for examination of financial institutions consists of quarterly and annual examination plans. The annual examination plan provides the basic examination parameters and activities for the year with a particular emphasis on supervision policy objectives. It thus sets financial institutions (and branches) to be selected, the types of examination to be carried out (full-scope and targeted), the tentative dates, the number of examiners to be assigned, and the scope of the examination activities.
The selection of financial institutions to undergo a full-scope examination during the year is made with due consideration given to the size, the complexity, and the risk profile of the subject institutions, and the examination cycle. On the other hand, the selection for targeted examination is typically influenced by incidence of unsound or improper business practices and irregularities. After the annual examination planning is completed, a quarterly examination plan is set detailing the order of financial institutions to be examined, the dates and the duration of the examinations, the number of examiners to be allocated, and other details. The finalized quarterly examination plans are shared with the Bank of Korea and the Korea Deposit Insurance Corporation.
As part of the pre-examination planning, FSS examiners gather information on the subject institution from a number of sources including off-site monitoring and previous supervisory evaluation and ratings and apprehend the institution’s overall financial and business status. A pre-examination team is also formed to lay the groundwork for the upcoming examination. The subject institution is given a prior notice providing examination and purpose and schedule at least one week ahead of the commencement of the examination. Under an unusual circumstance in which giving a prior notice may compromise or jeopardize the intended performance of the examination, no advance
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notice may be given to the subject institution. As a pre-examination step, the FSS conducts a “partnership meeting” where FSS examiners engage the executives of the subject institutions and brief them on the areas of examination focuses.
5.3 ON-SITE EXAMINATION
FSS examiners start off a full-scope on-site examination by meeting with the senior managers of the subject institution to give them appropriate guidance and expectations on the examination to be conducted. As part of the examination process, the examiner-in-charge may obtain statements and documentations from the subject institution’s managers and employees and, if necessary, from other related parties. The scope of the examination may be expanded to include additional branches and other institutions if evidence of misconduct by the subject institution and other institutions exists, and the misconduct identified requires more extensive inspection.
Upon the completion of the full-scope on-site examination, the examiner-in-charge meets with the management and the board directors of the subject institution to communicate the supervision and examination policies of the FSS and areas of weakness and other supervisory concerns that came to light as a result of the examination.
5.4 POST-EXAMINATION ACTION
Upon the completion of a full-scope on-site examination, the examiner-in-charge prepares the examination report detailing the examination findings that include corrective actions to be taken to address unsatisfactory or deficient areas. For more serious violations of laws and regulations, enforcement actions are recommended.
The examination report and enforcement action recommendations are reviewed internally at the examination department and at the Enforcement Review Office to ensure proper, fair, and objective post-examination actions. When the internal review by the FSS is completed, the FSC may conduct additional review if the gravity of the matters raised in the examination findings merits it and decide on the adverse actions to be taken. The review process also provides for opportunities for the subject institution and individuals to be sanctioned to file objections to adverse action decisions made by the Enforcement Review Committee or the FSC.
5.5 ENFORCEMENT ACTION
Post-examination enforcement actions are taken for violations of rules and regulations that have been identified during an examination. Adverse actions are imposed on the institution and its executives and employees as a supervisory measure to help ensure not only sound management of the institution but also contribute to the stability of the financial system. Enforcement typically takes the form of administrative sanctions against the subject institution and individuals involved in a rule violation. The types of sanctions that may be imposed on financial institutions and individuals are shown in Table 15.
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Table 15.Types of Sanctions
Financial institutions • Revocation of business authorization, approval, or registration• Whole or partial business suspension• Branch closure, whole or partial suspension of branch operations• Cease and desist order• Transfer of business contracts to an unaffiliated party• Order for public announcement or disclosure notice for wrongdoing• Institutional warning
Senior executives • Recommendation for dismissal• Work suspension• Disciplinary warning, admonition
Employees • Recommendation for dismissal• Work suspension• Pay reduction• Reprimand, disciplinary warning
Monetary penalty • Civil fine• Administrative fine
Other sanctions • Management caution• Order for corrective measures, commitment letter• Order for restitution • Referral for criminal penalty
Sanctions imposed on the financial institution or its employees may be appealed. To help ensure the fairness and objectivity of the appeal process, the Strategic Supervision Department administers the appeal and notifies the subject institution or employees of the result of the review within 60 days from the day the appeal was filed. When necessary, the review period may be extended by an additional 30 days.
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Figure 1.General Examination Process
Examination Planning
Tentative annual and quarterly examination plans and
coordination
Distribution of the annual examination plan to FSS supervision departments
Pre-examination Preparation
Examination notice to the subject institutions and
document requests
Collection of information pertinent to examination
Examination plan including the dates and examiner allocation
Analysis of off-site monitoring information, previous
examination findings, and partnership meetings
Supervision policy, key focus areas, and other matters of
interest
Examiner selection and strategy meetings
Completion of examination planning and preparation
Examinerpre-examination sessions
Main examination matters, alert lists
Formation ofexamination preparation
committee
Final annual examination plan
<<
<<
<<
<
<
<
<
<
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Full-scope On-site Examination
Administration of Examination
Findings
Post-examination Administration
Examination commencement
Examination execution
Examination report
FSC enforcement authority FSS enforcement authority
Deliberation by Enforcement Review Committee
FSC decision on enforcement action Report to the FSC
Review of examination findings
Joint FSC-FSS deliberation FSS decision on enforcement action
Reporting of Enforcement Review Committee to the governor
Deliver examination findings and supervision actions to the subject institution
Examination completion
Internal reporting to senior supervisors
Communication and meetings with management and board of
directors
<<
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6 Capital Market Supervision
Disclosure Rules
FISCMA provides for fair and transparent corporate disclosure in order to protect investors and ensure efficient and well-functioning securities markets. Accordingly, FISCMA establishes three general types of corporate disclosure: disclosure for new securities issuance, disclosure for listed companies, and disclosure for significant event.
Disclosure for new securities offering pertains to information that an issuer must file with the FSS about an investment to be offered for sale to the public. The disclosure is made in the form of registration statement and prospectus. Registration statement is filed by a prospective securities issuer about to make a public offering, while prospectus is a document the issuer prepares with facts about the offering to help investors make an informed investment decision.
Disclosure for listed companies refers to information about business operation and financial conditions that listed companies must file with the FSS periodically and as needed or appropriate. Disclosures for listed companies consists of Business Report filings that publicly traded companies submit to the FSS on their business operations, financial conditions, and other major aspects about their business, and material disclosure, which must be filed for any major business decision or external event that has a material effect on the company’s ongoing business operation.
In addition to disclosures applicable to new securities offering and listed companies, disclosure for significant event must be filed when a major development or change to a company’s business operations or financial conditions occurs. Excluding disclosures applicable to new securities offering and listed companies, disclosure for significant event includes large share ownership, disclosure for corporate insiders, tender offer, and short-swing profit.
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6.1 DISCLOSURE FOR NEW SECURITIES OFFERING
Public offering of new securities generally starts with the issuer (or the issuer’s board of directors) deciding on the final proposal for a public offering. The issuer then files a registration statement and the accompanying prospectus for the offering with the FSS. Following a waiting period, the issuer may begin to solicit investors and receive subscriptions. Upon the completion of the offering and settlement of transaction payments with investors, the issuer files a report on the completed offering with the FSS and starts to issue the securities to investors (or registers the securities with the Korea Securities Depository). The securities are then listed and traded publicly.
6.1.1 Primary and secondary solicitation Under FISCMA, specific standards apply to issuers that solicit investors for new securities offering and for seasoned securities offering. Whereas primary solicitation refers to the act of soliciting 50 or more investors to purchase newly issued securities, secondary solicitation refers to the act of soliciting 50 or more investors to purchase or sell securities that have already been issued.
6.1.2 Registration statement Registration statement must be filed with the FSS when the offering amount is more than KRW1 billion. No solicitation for investors is permitted until the issuer files a registration statement with the FSS and obtains a clearance to proceed with the securities offering.
Reporting person for registration statement
The reporting person or the person responsible for filing a registration statement for a securities offering is the issuer. Where a person other than the issuer engages in secondary solicitation, the reporting person is also the issuer.
Securities subject to reporting
Under FISCMA, securities offered through primary and secondary solicitations must in principle be registered; securities exempted from registration are enumerated in FISCMA and its subordinate regulations; they include government treasuries, municipal bonds, and other special entities and enterprises that have been established by an act of the National Assembly.
Offering amount subject to reporting
Registration must be filed when the amount of a securities offering—through either primary solicitation or secondary solicitation—exceeds KRW1 billion. The amount of the securities offering is determined on the basis of the sum of the offering to be made for a year.
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Waiting period and effective date of registration
Registration statement becomes effective when the waiting period for the FSS review of the filing (after it is accepted) ends. The issuer may not engage in any solicitation prior to the filing of a registration statement, and registration statement that takes effect thereafter with an FSS clearance does not mean it is devoid of any misrepresentation or inaccuracy. (See Table 16.)
Corrected registration statement
The issuer may submit a corrected registration statement for changes that need to be made to the initial registration statement. Changes to material disclosure items in the registration statement must be filed irrespective of the issuer’s intent. The issuer must also submit a corrected registration statement upon a request or a directive from the FSS.
Table 16.Waiting Period for Registration Statement(Number of days)
Listed companies Others
StockGeneral offering, shareholder priority offering 10 15
Shareholder/third party allotments 7 7
BondsGuarantee bonds, collateral-backed bonds, ABS 5 5
Unguaranteed bonds 7 7
Closed-end fund - 10 10
Other securities - 15 15
6.1.3 Shelf registration statement Shelf registration, which enables an issuer to register a public offering in advance and for multiple offerings using the same registration, is permitted for an issuer that meets all of the following criteria:
(a) The issuer is an FISP that has made a public offering within the most recent fiscal one-year period and has submitted the semiannual and annual filings of the Business Report with the FSS during the most recent fiscal year;
(b) The issuer has received an unqualified opinion for its financial statements from the issuer’s external auditor for the most recent accounting year; and
(c) The issuer has not received any restriction or other adverse actions from the FSS on issuing securities during the previous one-year period.
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Well-known seasoned issuers that meet all of the following conditions also qualify for shelf registration when issuing convertible bonds, bonds with warrants, participating bonds, and exchangeable bonds:
(a) More than five years have elapsed since the issuer became a listed company;
(b) The issuer’s market capitalization on the last trading day of the issuer’s most recent accounting period exceeded KRW500 billion;
(c) The issuer has complied with the quarterly, semiannual, and annual filings of Business Report with the FSS for the previous three years;
(d) The issuer has received an unqualified opinion from its auditor for the most recent accounting year; and
(e) The issuer has not received a fine or a heavier sanction for accounting misconduct or violation of FISCMA for the previous three years.
Effective duration for shelf registration
Shelf registration enables an issuer to comply with the registration requirements up to one year from two months after the effective date of the registration. An issuer that files a shelf registration must make a minimum of three securities offerings during the expected offering period. Well-known seasoned securities issuers are eligible for shelf registration up to two years with no minimum number of securities offering required during the offering period.
6.2 DISCLOSURE FOR LISTED COMPANIES
FISCMA provides two general types of disclosures of listed companies. One is the periodic disclosure that companies file with the FSS on a quarterly, semiannual, and annual basis during each accounting period. The other is material disclosure, which companies must file with the FSS for any event that has a material effect on investors or their investment decision. The Korea Exchange, a self-regulatory organization, also enforces its own disclosure rules—material business disclosure, inquired disclosure, and fair disclosure—to ensure smooth and orderly trading.
6.2.1 Periodic disclosure
Periodic disclosure is another type of Business Report filing that listed companies provide to the FSS on their business operations, financial conditions, and management for the purpose of public disclosure. The express aim of the periodic disclosure regime is to help investors make informed investment decisions, contribute to fair and reliable price formation, and help maintain fair and orderly markets. The Annual Report is filed within 90 days after the end of the accounting period, while the Quarterly Report and the Semiannual Report are filed within 45 days following the end of the accounting period.
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Companies that are subject to periodic disclosure include (1) those whose shares are listed and traded at the Korea Exchange, (2) those that have issued on the KOSPI Market or KOSDAQ Market or KONEX Market shares and other equity rights or claims, unsecured bonds, convertible bonds, bonds with warrants, participating bonds, exchangeable bonds, preemptive rights, depositary receipts, or structured financial products, (3) issuers that fall under either of subparagraph (1) or (2) and whose securities have been delisted, and (4) issuers that are subject to external audit pursuant to the Act on External Audit of Stock Companies and have more than 500 shareholders for each of the securities falling under either of subparagraph (3).
The requirement to file the Business Report with the FSS may be waivered for companies in exceptional circumstances such as bankruptcy, dissolution, or involuntary delisting from the stock exchange.
Consolidated financial reporting
Companies subject to filing the Business Report must present their financial statements on a stand-alone basis or a consolidated basis, whichever is applicable. Auditor’s opinion must accompany financial statements submitted by the subject companies.
Disclosure items under Business Report
Information to be disclosed in the quarterly and semiannual filings of the Business Report is similar to information to be made available in the regular filing of the Business Report. In addition, consolidated financial reporting is applicable to companies that have opted for financial reporting under the IFRS. Information to be disclosed in the Business Report filing includes the following:
• Company’s business objectives;
• Business name;
• Nature of business operations and activities (manufacturing, services, and financial services);
• Compensation for company officers;
• Status of the board of directors, subsidiaries and affiliates, and other governance and organization matters;
• Shareholder composition and other shareholder information;
• Directors and officers;
• Transactions with related parties;
• Financial statements and auditor’s opinion;
• Management discussion and analysis (MD&A); and
• Other disclosures relevant to investor protection.
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6.2.2 Material disclosure
Companies subject to the quarterly, semiannual, and annual filings of the Business Report must also comply with material disclosure that requires timely, up-to-date disclosure of any significant changes. Material disclosure must be filed within one day from the day of the occurrence. Activities, developments, and changes subject to material disclosure include the following:
• Failure to redeem notes, suspension of banking accounts;
• Partial or whole suspension of business operations;
• Submission of application for court receivership or accelerated court receivership pursuant to the Debtor Rehabilitation and Bankruptcy Act;
• Occurrence of a legally recognized cause for business dissolution;
• Capital increase and reduction, decision by the board of directors on debt increase (contingent convertible bonds);
• Initiation of a management procedure under article 5(2) of the Corporate Restructuring Promotion Act or suspension of a joint management procedure under article 19 of the same Act by a main creditor bank;
• Filing of a securities class action;
• Decision to list on or delist from foreign stock exchanges, trading suspension;
• Decision to issue convertible bonds, bonds with warrants and exchangeable bonds;
• Occurrence of a trigger of contingent convertible bonds or occurrence of a trigger for redemption and reduced interest payment liability for contingent convertible bonds;
• Resolution of the acquisition (completion of trust agreement) or disposition (termination of trust agreement) of treasury stocks;
• Decision on merger, share exchange or transfer, division and split merger (decision on major business activity or asset disposition or transfer); and
• Exercising a putback option to give the beneficiary the right to execute a major asset disposition or transfer.
6.3 DISCLOSURE OF SIGNIFICANT EVENT
6.3.1 Reporting of large share ownership
Under the regulation on the disclosure of large equity ownership in listed companies commonly referred to as the “five percent rule,” a shareholder acquiring a class of equity securities of a listed company must file a report with the FSS and the Korea Exchange within five days after the acquisition when:
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(a) The shareholder acquires five percent or more of the listed company’s total equity securities issued (the “five-percent shareholder”);
(b) The five-percent shareholder raises or reduces its equity ownership by one percentage point or more; or
(c) The five-percent shareholder alters the purpose of its equity ownership or enters into or amends an agreement that can materially affect its equity ownership in the listed company.
The five percent rule is intended to ensure fair and orderly dissemination of information to investors and help them make informed decisions. By facilitating effective disclosure of material information pertaining to large equity acquisitions and dispositions to all market participants, the five percent rule also contributes to more transparent and orderly market competition for the management control of publicly held companies.
Three types of five percent disclosure
The five percent rule provides three types of disclosure in respect of the five percent rule: initial acquisition report, subsequent change report, and material change report.
(a) Initial Acquisition Report: When the equity ownership of a shareholder and persons specially related to the shareholder (“specially related persons”) exceeds five percent for the first time, an initial acquisition report must be filed with the FSS and the Korea Exchange within five days after the date of the acquisition.
(b) Subsequent Change Report: When a five-percent shareholder raises or reduces its equity ownership by one percentage point or more, a subsequent change report must be filed with the FSS and the Korea Exchange within five days immediately after the date of the change.
(c) Material Change Report: A material change report must be filed when:
• A five-percent shareholder amends the purpose of its equity ownership from passive investment to influencing company management (or vice versa);
• A five-percent shareholder whose purpose of equity ownership is to influence company management enters into or amends an agreement that can materially affect the shareholder’s equity ownership in the listed company; such an agreement may include a contractual relationship or obligation to place the shareholder’s equity securities under the management of a trust or to employ the equity securities for use as collateral or for securities lending or borrowing; the determination of whether an agreement or any
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change therein constitutes a disclosure-triggering event is to be made on the basis of the likelihood of a material change to the shareholder’s equity ownership; and
• A five-percent shareholder whose purpose of equity ownership is to influence company management amends the status of its equity ownership from legal ownership to beneficial ownership (or vice versa).
Securities covered under the five percent rule
The following classes of equity and equity-convertible securities are subject to disclosure under the five percent rule:
(a) Stocks including common voting stock, preferred voting stock, preferred nonvoting stock that becomes voting in the event of no dividend, and convertible preferred stock;
(b) Certificates representing rights/options to acquire new shares, including preemptive rights certificates and warrants;
(c) Convertible bonds;
(d) Bonds with warrants;
(e) Exchangeable bonds with equity conversion rights/options to any of the securities listed in subparagraphs (a) through (d); and
(f) Structured financial instruments with any of the securities listed in subparagraphs (a) through (e) as the underlying assets.
When issued by an issuer other than the listed company, the following classes of securities are subject to disclosure under the five percent rule:
(a) Depositary receipts linked to any of the securities listed in subparagraphs (a) through (f);
(b) Exchangeable bonds with equity conversion rights/options to any of the securities listed in subparagraphs (a) through (g); and
(c) Structured financial instruments with any of the securities listed in subparagraphs (a) through (h) as the underlying assets.
Persons covered under the five percent rule
When the aggregate equity ownership of a shareholder and its specially related persons—defined as persons related to the shareholder (“related persons”) and/or persons that jointly hold the issuer’s equity securities with the shareholder
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(“joint holders”)—exceeds five percent, both the shareholder and the specially related persons must file a disclosure under the five percent rule. Where both the shareholder and the specially related persons must file a report, the shareholder with the largest equity ownership may file a single joint report on behalf of the group.
The shareholder and the specially related persons filing a disclosure under the five percent rule must comply with additional disclosure requirements that are specifically applicable to corporate insiders such as directors, officers, and major shareholders.
1. Specially related person Specially related person is a collective designation for the related person and the joint holder of a shareholder. Both related persons and joint holders are specially related persons of a shareholder.
2. Related person Where the shareholder is a natural person, the related person designation extends to the following persons:
(a) Spouse (including a person in a de facto marriage);
(b) A company (and its directors and officers) at least 30 percent owned or effectively controlled by the shareholder, alone or together with any of the persons listed in subparagraphs (a) through (g); and
(c) A company or an entity (and its directors and officers) effectively controlled by the shareholder, alone or together with any of the persons listed in subparagraphs (a) through (h).
Where the shareholder is a legal entity, the related person designation extends to the following persons and entities:
(a) Shareholder’s directors and officers;
(b) Shareholder’s affiliate (as recognized under the Monopoly Regulation and Fair Trade Act) and the affiliate’s directors and officers;
(c) A natural person—including any of the related persons listed in subparagraphs (a) and (b)—that holds at least 30 percent of the shareholder or effectively controls it; and
(d) A company or a business group—including its directors and officers—that, alone or together with any of the related persons listed in subparagraphs (a) through (c), holds at least 30 percent of the shareholder or effectively controls it.
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Where a related person is able to verify it holds less than 1,000 shares and it is not a joint holder, the related person’s equity securities are excluded from the equity ownership calculation.
3. Joint holder A joint holder is a designation given to a shareholder that engages in any of the following activities under a mutual consent or under an agreement with another shareholder:
(a) Acquiring or disposing of equity securities jointly with another shareholder;
(b) Acquiring equity securities alone or jointly with another shareholder and transferring the acquired equity securities to another shareholder; or
(c) Exercising voting rights (including the right to dictate voting) jointly with another shareholder.
4. Legal and beneficial ownership The five percent rule incorporates the concept of “securities held” to broadly encapsulate not only a shareholder’s legally and beneficially owned equity securities, but also the shareholder’s legally and beneficially owned equity conversion rights/options that may be exercised to acquire equity securities or wield voting powers as provided below:
(a) A person pays for and receives the issuer’s equity securities using the name of another person to conduct the purchase; the duty to file a report under the five percent rule falls on the person that beneficially owns the equity securities irrespective of whether or not the purchase has been made under the name of another person;
(b) A person obtains a right to compel another person to deliver equity securities under the provisions of law involved or the terms and conditions of an agreement;
(c) A person obtains a right to acquire or dispose of equity securities or exercise voting rights under the provisions of law involved or under the terms and conditions of an agreement such as a contract to place assets under a trust, a collateral agreement, or a discretionary asset management contract;
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(d) A person enters into a pre-agreement to acquire a listed company’s equity securities, thus attaining the position of a potential shareholder of the listed company;
(e) A person acquires call options that may be exercised to acquire a listed company’s equity securities, thus attaining the position of a potential shareholder of the listed company; and
(f) A person receives stock options that may be exercised to acquire a listed company’s equity securities, thus attaining the position of a potential shareholder of the listed company.
6.3.2 Disclosure for corporate insiders
A person who becomes a corporate insider—a director or an officer or a major shareholder of a listed company—for the first time must file a disclosure on its legal and beneficial equity ownership in the company (the issuer) within five days with the SFC/FSS and the Korea Exchange. Any change in the insider’s equity ownership thereafter must also be reported to the SFC/FSS and the Korea Exchange within five days. Equity securities issued by the company and held by its corporate insiders are referred to as specific securities.
Corporate insiders are subject to strict equity ownership disclosure requirements because they are assumed to be privy to material nonpublic information about their company that may be abused for personal gains. The disclosure requirements are intended to ensure timely and fair disclosure of insiders’ equity interests and any trade involving them to the market.
Specific securities
The term “specific securities” refers to any of the following classes of securities:
(a) Equity and equity-convertible securities such as voting stock, preferred nonvoting stock, convertible bonds, bonds with warrants, participating bonds, and investment contracts;
(b) Depositary receipts and exchangeable bonds linked to the equity securities listed in subparagraph (a); and
(c) Derivatives and other investment products whose underlying assets consist of any of the securities listed in subparagraphs (a) and (b).
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Persons subject to disclosure
A company’s directors and officers and major shareholders are primarily subject to insider disclosure rules.
1. Directors and officers Directors and officers who are subject to insider disclosure requirements refer to:
(a) Directors (including outside directors) and the auditor elected by the company’s shareholders at the general shareholders’ meeting; or
(b) Officers as provided under article 401-2(1) of the Commercial Act; they may include: (i) persons who effectively control the company and routinely order company directors to carry out specific activities; (ii) persons who can act on behalf of the company; and (iii) persons who are not directors but perform executive duties and functions assuming such titles as honorary president, president, chief executive officer, executive director, director, or other titles indicative of decision-making position or authority.
The directors and officers of an affiliate of the listed company are not subject to insider disclosure irrespective of whether or not they are registered or unregistered directors.
The determination of whether a person is a company officer is to be made by the person in consideration of the following:
(a) A person carries out company duties assuming such job titles as honorary president, president, chief executive officer, executive director, and director; or
(b) Where a person assumes an advisor title or a director-equivalent title, the determination is to be made with due consideration given to the following:
• Use of the title within the company;
• Areas of responsibility and decision-making authority; or
• Amount of remuneration.
2. Major shareholders The term “major shareholder” denotes either of the following shareholders:
(a) A shareholder that holds at least 10 percent of the company’s total voting equity securities issued, including depositary receipts that have
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been issued for such securities (irrespective of whether the voting equity securities are held in the name of the shareholder or not); or
(b) A shareholder that holds less than 10 percent of the total voting equity securities issued, but nevertheless effectively controls the company.
The ownership of specific securities such as convertible bonds and bonds with warrants that are not voting equity securities is not relevant to the determination of a major shareholder when the shareholder’s voting equity securities in the company are less than 10 percent. Therefore, a shareholder that holds 7 percent of the voting equity securities and 3 percent of the convertible bonds issued by the company is not a major shareholder unless the shareholder effectively controls the company.
In calculating a shareholder’s ownership of specific securities, equity securities held or traded under another person’s name are included. Similarly, equity securities acquired and held under the employee stock ownership plan count toward equity ownership of a major shareholder.
A shareholder that effectively controls a company is a shareholder that:
(a) Has appointed, alone or together with other shareholders, the company’s chief executive officer or the majority of the members of the company’s board of directors; or
(b) Holds the decision-making authority in respect of the company’s business management, organization change, and other key decisions. The determination of whether a shareholder meets this criterion (and liability for the determination) is left to the shareholder.
Disclosure period
A person who becomes a director, an officer, or a major shareholder of a listed company for the first time must file a report on the ownership of specific securities issued by the company. An initial ownership report must be filed within five days after the person becomes a director, an officer, or a major shareholder. No initial ownership report is required if the person does not hold any legal or beneficial ownership of specific securities.
A change in ownership report must be filed within five days when a change in the ownership of an insider’s specific securities occurs.
1. Effective date for initial ownership report
(a) Where a person is elected a director at the company’s general shareholders’ meeting for the first time, the effective date is the day of the election.
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(b) Where a person becomes an officer, the effective date is the day the person assumes the appointed position.
(c) Where a person becomes a major shareholder after acquiring company shares, the effective date is the day of the share acquisition.
(d) Where an unlisted company becomes listed for the first time, the effective date is the day the company becomes listed.
(e) Where an unlisted company merges with a listed company, and an insider of the unlisted company becomes an insider of the listed company, the effective date is the day the shares of the merged company commences trading.
2. Effective date for change in ownership report
(a) Where an insider either buys or sells specific securities on-exchange during regular trading hours, the effective date is the day of the transaction settlement (T+2).
(b) Where an insider either buys or sells specific securities off-exchange, the effective day is the earlier of either the date the payment was made or the date the securities are delivered.
(c) Where an insider acquires specific securities in a secondary stock offering, the effective date is the date immediately following the day the payment is delivered.
(d) Where an insider lends or borrows specific securities, the effective date is the day the securities are lent or borrowed.
(e) Where an insider receives specific securities as a gift, the effective date is the day the delivery of the securities is completed.
(f) Where an insider inherits specific securities, the effective date is the day the inheritance is finalized. Where two or more persons inherit specific securities, the effective date is the day the division of the securities and any other share-related assets is completed.
(g) Where an insider acquires specific securities through other means, the effective date is to be determined as provided under the applicable law:
• Acquisition of scrip shares (capitalization shares): the date the scrip shares were allotted;
• Acquisition of stock dividends: the date the stock dividend distribution was approved at the company’s general shareholders’ meeting;
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• Acquisition of shares from the exercise of equity conversion rights/options attached to convertible bonds: the date the conversion rights/options were exercised;
• Acquisition of shares from the exercise of equity conversion rights/options attached to bonds with warrants and stock options: the date payment for the shares was made;
• Acquisition of shares of a newly merged company: the date of the merger registration; and
• Reverse stock split, stock split, and share redemption: applicable provisions of the Commercial Act.
3. Exemptions from change in ownership report Where the aggregate number of specific securities of an insider was less than 1,000 shares, or either the acquisition or the disposition amount was less than KRW10 million after the most recent filing, a change in ownership report is not necessary. The determination of disclosure exemption must be made on a cumulative basis.
4. Extension of disclosure deadline For a change in share ownership due to stock dividend, stock split, reverse stock split, capital reduction, or other unavoidable causes, the disclosure deadline is extended to the tenth day of the following month. For certain qualified investors that pose little or no risk of abuse of inside information, the disclosure deadline is extended to the tenth day of the following quarter. The disclosure deadline for the initial ownership report remains unchanged at five business days. The qualified investors exempted from the five-day disclosure period include the following:
• National and municipal governments;
• Bank of Korea;
• Korea Deposit Insurance Corporation and Korea Resolution & Collection (KR&C);
• Korea Asset Management Corporation;
• Korea Housing Finance Corporation;
• Korea Investment Corporation;
• Korea Securities Depository;
• Korea Exchange;
• Financial Supervisory Service;
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• Collective Investment Scheme;
• Korea Credit Guarantee Fund;
• Korea Technology Finance Corporation;
• Funds and fund managing entities established under the law; and
• Joint enterprises established for member benefits under the law.
6.3.3 Tender offer
Disclosure for Significant Event applies to tender offer, which is made pursuant to the relevant FISCMA provisions. Under the law, a tender offer must be made and a tender offer statement filed when a person who together with any specially related parties seeks to purchase or otherwise acquire from at least ten shareholders of a listed company more than 5 percent of the company’s shares. The period specified for the acquisition through a tender offer is six months.
Announcement of tender offer and tender offer statement
The prospective acquirer must announce the tender offer through widely circulated newspapers with specific information pertaining to the purpose of the offer, the number and the type of securities sought, the terms and conditions of the offer, and the methods to be used to acquire the desired shares. The prospective acquirer must submit a tender offer statement to the FSS on the day of the public announcement of the offer.
Corrected tender offer statement
The prospective acquirer may submit a corrected tender offer statement before the tender offer period expires to incorporate any changes to be made to the terms and conditions of a tender offer. Changes that are disadvantageous to the existing shareholders—such as a reduction in the purchase price or the number of shares to be acquired—are prohibited.
6.3.4 Short-swing profit rule
Under the FISCMA short-swing profit provisions and the subordinate regulations (the “short-swing profit rule”), corporate insiders must return any profit they realize from the purchase and sale or the sale and purchase of certain classes of equity securities—referred to as “specific securities” under FISCMA—within a six-month period. The disgorgement of short-swing profit is effective irrespective of whether or not any insider information was used to realize the profit.
The short-swing profit rule is intended to prevent corporate insiders from trading specific securities on the basis of material, nonpublic information. Such insider trading is illegal, and the short-swing profit rule imposes civil and criminal penalties on the violators in order to ensure no unauthorized disclosure or privileged inside information is used for personal gains.
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Insiders who are subject to short-swing profit disclosure include:
(a) Directors, officers, and others covered under article 401-2(1) of the Commercial Act;
(b) Employees handling or given access to privileged nonpublic company information, including employees administering the company’s regulatory filings as provided under FISCMA article 161(1); and
(c) Major shareholders (shareholders with equity ownership of ten percent or more in the company) or shareholders that effectively control the company.
There is no criminal liability for insiders who realize short-swing profit, and the transaction remains valid. When claimed by the company, however, the insider only needs to give back the short-swing profit realized, and the right to claim such profit is extinguished within two years after the profit was realized as provided in article 172 of FISCMA.
Unfair Trading and Enforcement
Unfair trading covers a wide range of illegal buying and selling of securities in the market. Although unfair trading is not expressly defined in the law, it is broadly classified into three general types under FISCMA: (i) trading on the basis of material nonpublic information; (ii) trading intended to facilitate market manipulation; and (iii) trading employing deception. In addition, new rules aimed at market abuses whose degrees of illegality are not as serious as those of previously recognized unfair trading activities under FISCMA also took effect in July 2015.
6.4 TRADING OF SECURITIES ON THE BASIS OF MATERIAL NONPUBLIC INFORMATION
FISCMA strictly prohibits insider trading or the buying and selling of a publicly traded company’s securities by insiders using material nonpublic information. Using undisclosed information to buy or sell the securities of a company set to become a publicly traded company within six months is also prohibited.
The prohibition on the use of material nonpublic information covers not only insiders, but also quasi-insiders and tippees who may become privy to material nonpublic information. Such persons include:
(a) Company’s directors, officers, employees, and agents;
(b) Company’s major shareholders and their agents and other related information users;
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(c) Persons with legally granted regulatory or licensing authority over the company and their agents;
(d) Company’s contractors and their agents and employees;
(e) Directors, officers, employees, and major shareholders of the company’s affiliate or subsidiary; and
(f) Persons or insiders of a company currently in negotiation with the company.
6.4.1 Corporate insiders covered under prohibition on use of material nonpublic information
The directors and officers and major shareholders of a listed company are corporate insiders who are specifically covered under the prohibition on the use of material nonpublic information. Directors refer to directors (including outside directors) and the auditor elected by the company’s shareholders at the general shareholders’ meeting. As provided under article 401-2(1) of the Commercial Act, company offers include: (i) persons who effectively control the company and routinely order company directors to carry out specific activities; (ii) persons who can act on behalf of the company; and (iii) persons who are not directors but perform executive duties and functions assuming such titles as honorary president, president, chief executive officer, executive director, director, or other titles indicative of decision-making position or authority. A person is deemed a company officer if the person performs corporate duties assuming such job titles as honorary president, president, chief executive officer, executive director, or director.
A major shareholder is a person who holds at least 10 percent of the company’s total voting equity securities issued, including depositary receipts that have been issued for such securities (irrespective of whether the voting equity securities are held in the name of the shareholder or not). A shareholder who holds less than 10 percent of the total voting equity securities issued, but nevertheless effectively controls the company, is also deemed a major shareholder.
6.4.2 Prohibition on use of information pertaining to large share purchase and sale
FISCMA prohibits the use of information stemming from or pertaining to a large share purchase or sale to buy or sell securities to protect investors. A share purchase or sale is deemed large if it is deemed sufficient to materially affect the company’s management control. Persons subject to the prohibition on the use of information pertaining to large share purchase and sale include:
(a) A company (including its affiliates) that engages in the purchase or sale, and the company’s officers, employees, agents, and others who come to possess knowledge of the transaction;
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(b) Major shareholders of the company engaging in the purchase or sale and others who become privy to the transaction; and
(c) Persons who exercise legally granted regulatory or licensing authority over the company and who come to possess knowledge of the transaction.
6.5 TRADING OF SECURITIES INTENDED TO FACILITATE MARKET MANIPULATION
Market manipulation, generally defined as a deliberate attempt to alter the prevailing share price and to profit from the artificially raised or reduced share price, is a violation of the securities law. Market manipulation includes orchestrated purchase and sale of securities in the spot and in the futures markets and covers trades involving listed and unlisted securities (including derivatives) through either the exchange or the OTC markets.
Market manipulation through disguised trading such as matched orders and wash sale that involve the purchase and sale of a company’s shares by a person or an organized group of persons to create an impression of significant trading is a violation of the law. Specifically, it is a violation of the law to conspire with others to buy and sell a prearranged number of securities at a prearranged price with each other or to engage in fictitious buying or selling without transferring the legal ownership of the securities. Another common market manipulation is the creation of false trading impression. Manipulating a market price by creating a misleading or false trading impression on others is also a violation of the law. Such manipulation usually involves individuals who engage in prearranged buying and selling to create a false or misleading impression of significant trading.
6.6 TRADING OF SECURITIES EMPLOYING DECEPTION
FISCMA comprehensively prohibits trading of securities aimed at generating pecuniary or other financial gains through: (i) the use of an unfair means, scheme, or technique; or (ii) misrepresentation or omission of material information. Disseminating a rumor, employing deception, or using violence or threat to facilitate buying or selling of securities or manipulate the market price is prohibited as unfair trading under FISCMA.
6.7 MARKET ABUSES
Under the newly amended FISCMA, market abuses are broadly grouped into abuses involving the use of insider and outsider information and abuses involving market manipulation.
Market abuse involving the use of insider and outsider information
Prior to the market abuse amendments that took effect on July 1, 2015, FISCMA provisions prohibiting the use of material nonpublic information (article 174) did not extend to insider information received second-hand or more remotely, or privileged
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information generated or held by outsiders such as material nonpublic information pertaining to a significant market activity or a major government action or policy decision. After the market abuse amendments took effect, making use of nonpublic information received second-hand or more remotely, privileged information generated or held by outsiders, or information obtained through hacking or other unlawful means is strictly prohibited.
Market abuse involving market manipulation
Prior to the market abuse amendments to FISCMA, provisions barring trading of securities aimed at market manipulation (article 176) and other unlawful trading activities (article 178) were difficult to enforce in the absence of an intent to induce others to trade in a certain way or an objective to achieve unlawful financial gains. After the market abuse provisions took effect in July 2015, enforcement action in the form of a punitive fine can be taken against a person when that person is judged to distort or hold the potential to distort the market price by placing a large buy/sell order without any intent to execute, engaging in wash sales, placing a matched order, or disseminating a false rumor.
6.8 INVESTIGATION AND ENFORCEMENT
As authorized under FISCMA, the SFC is vested with the powers to investigate unfair trading and take appropriate enforcement actions. The powers specified for the SFC under FISCMA include disgorgement of gains from short-swing profit by corporate insiders, reporting of share ownership by company officers and other insiders, prohibition on the use of material nonpublic information, prohibition on market manipulation, and prohibition on unlawful securities trading. The SFC is also granted the authority to investigate security offerings in the primary and secondary markets.
FISCMA authorizes the SFC to delegate the power to investigate unfair trading to the FSS. As a result, it is the FSS that actually performs the investigation of unfair trading and other securities law violations under the authority of the SFC. (In addition to the SFC, the FSC delegates its broad investigation and enforcement powers to the FSS.)
With a court-issued warrant, the SFC may conduct interviews, order document submission, and search the premises of individuals who are suspected of unfair trading connected with short-swing profit of a company insider, share ownership reporting, use of material nonpublic information, market manipulation, unlawful securities trading, or short-selling.
6.8.1 Investigation methods
As provided under FISCMA and the Act on Real Name Financial Transactions and Confidentiality, the FSS may perform investigation of unfair trading under the authority of the SFC in the following manner:
(a) Request records and other relevant documents;
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(b) Request statements and affidavit from individuals who are involved in or connected with unfair trading;
(c) Summon for questioning individuals who are involved in or connected with unfair trading;
(d) Hold in custody documents and objects pertaining to unfair trading;
(e) Examine financial institution for unfair trading investigation; and
(f) Obtain information from government administrative agencies and from foreign supervisory authorities.
6.8.2 Corrective measures and enforcement actions
When an investigation leads to the discovery of unfair trading, corrective measures and enforcement actions available to the FSS include:
(a) Refer the suspected individuals to the law enforcement authorities;
(b) Issue a warning or a corrective action;
(c) Impose an administrative fine, restrict new securities issuance, or refer to the law enforcement authorities for a disclosure violation; and
(d) Demand pay reduction and removal from the job for company officers and employees involved in unfair trading.
The SFC may refer some investigations to the prosecution authority as a priority under certain circumstances as follows:
(a) Action is needed because the SFC is unable to convene for an extended period as a result of unexpected developments and circumstances such as a natural calamity;
(b) Referral to the prosecution authority is needed because an unfair trading matter under FSS investigation is also being investigated by the prosecution authority;
(c) Violation of the securities law and regulation is recurring and threatening investors; or
(d) Action is needed to prevent a suspect from destroying evidence or fleeing.
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6.8.3 Investigation and enforcement process
Investigation and enforcement of unfair trading is shared among the Korea Exchange, the FSS, and the prosecution authority. Whereas the Korea Exchange as a self-regulatory organization for the securities industry is charged with market monitoring and fact finding, the FSS conducts or takes charge of unfair trading investigations requiring highly technical or specialized expertise. The government prosecution authority works to impose criminal penalties for violation of the securities law. Thus, when the Korea Exchange detects a suspicious share price movement or an unusual trading activity, it forwards to the FSS information pertaining to the suspicious trading and individuals involved. The FSS then initiates additional fact finding and information collection and requests document submission and interviews from suspected individuals in order to determine whether any violation of law occurred. Where criminal penalty is warranted, the FSS refers the case to the prosecution authority on behalf of or through the SFC.
The FSC may also investigate cases of unfair trading using its own broad investigation and enforcement powers on the basis of information received from the Korea Exchange and refer the cases to the prosecution authority for criminal action through the SFC.
Accounting Supervision
The legal framework for accounting supervision comprises FISCMA, the Act on External Audit of Stock Companies, and the Certified Public Accountant Act.
FISCMA provides disclosure measures such as a periodic filing of Business Report in order to ensure the accuracy and reliability of financial reporting. It also requires audited financial reporting from listed companies that are subject to Business Report filing. In addition, FISCMA requires companies to continually operate internal controls, evaluate internal audit and the external auditors, and provide detailed assessment in their Business Report.
The Act on External Audit of Stock Companies provides for independent external audit of listed companies and others subject to independent external audit. Listed companies are required to appoint an auditor for a three-year term but may dismiss the auditor before the three-year term ends with the approval of the company’s audit committee and reporting to the SFC. The Certified Public Accountant Act governs the qualification, registration, services, rights, and duties of certified public accountants (CPAs) and accounting firms. CPAs and accounting firms must register with the FSS. Under the Act on External Audit of Stock Companies, any group of three or more CPAs that operates as a non-business entity must register with the Korean Institute of Certified Public Accountants to carry on audit performance.
Companies subject to external audit are required to present financial statements in accordance with the established accounting standards. With accounting oversight authority delegated from the SFC, the FSS examines listed companies’ and unlisted
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financial services firms’ financial statements and the audit performed while it inspects the auditor’s report. Companies subject to external audit must also operate with an internal accounting management system for the preparation of accounting information. The auditor must also prepare an evaluation of the actual status of the audited company’s internal accounting management system and disclose it in the Business Report.
Table 17.Legal Framework for Accounting Supervision
Financial Investment Services and Capital Markets Act
Act on External Audit of Stock Companies
Objective • Efficient functioning of primary and secondary securities markets;• Protection of investors;
• Effective accounting supervision through independent external auditors;• Protection of market participants;
Regulatedentities
• Listed companies and others subject to the filing of Business Report;
• Companies subject to independent external audit;• Auditors;
Regulatory reporting
• Registration statements;• Quarterly, semiannual, and annual
filings of Business Report;
• Financial statements;•Auditor’sreport;
Accounting supervision and procedure
• Mandatory audited financial statements of companies subject to filing Business Report;
• Mandatory audit of financial statements subject to independent external audit;
• Affirmation of compliance with registration statement and Business Report filing requirements;
• Affirmation of compliance with accounting standards by company management;
• Internal monitoring and controls; • Internal accounting and audit management systems;
• Review and inspection of companies subject to the filing of Business Report;
• Review of auditor’s report (company and auditor);• Inspection of quality controls for
auditing firms;
• Adverse supervisory actions to companies including monetary fines, restrictions on new securities issuance, and other administrative actions;
• Adverse supervisor actions to the auditor including monetary fines;
•Adverse supervisory actions to companies including recommendation for dismissal of officers, restrictions on new securities issuance, appointment of designated auditor, and other administrative actions;
• Adverse supervisory actions to the auditor including restriction on audit of listed companies, audit suspension, and other administrative actions;
• Adverse supervisory actions to certified public accountants (CPAs) including the recommendation for revocation or suspension of license, restriction on duties as auditors, warnings, and other administrative actions;
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6.9 AUDIT REVIEW AND QUALITY CONTROL INSPECTION
The chief executive officer of a listed company is responsible for the preparation of the company’s financial statements in accordance with the established accounting standards. The company’s auditor then performs an independent audit of the accuracy and the reliability of the company’s financial statements and delivers an audit opinion. The primary objective of accounting supervision is to review whether financial statements and the auditor’s report are prepared according to the relevant standards. Reviewing the design and operation of auditors’ quality control systems is another important accounting supervision objective.
6.10 COMPANIES SUBJECT TO AUDIT REVIEW
Under the authority delegated from or charged by the SFC, the FSS performs a review of audited financial statements from listed companies and unlisted financial services firms. The Korean Institute of Certified Public Accountants contributes to the audit review process by performing reviews of audited financial statements from companies not covered by the FSS.
Audit review broadly falls into either a targeted audit review or a sample audit review. The FSS conducts a targeted audit review when:
(a) The FSC requests a review;
(b) The FSC or the SFC suspects an accounting or audit violation;
(c) The SFC receives a request from a law enforcement authority with specific allegations about an accounting or audit violation; or
(d) The SFC receives a request from a corporate insider, an audit participant, or other sources with credible charges of accounting misconduct.
The FSS also conducts a sample audit review employing quantitative analysis methods utilizing financial analysis tools or random sampling methods.
6.11 AUDIT SUPERVISION
Under authorities delegated from or charged by the SFC, the FSS performs quality control inspection of auditors that:
(a) Perform audit of one percent or more of listed companies as of the end of April each year;
(b) Perform audit of listed companies with assets of KRW1 trillion or more as of the end of April each year;
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(c) Employ 30 or more CPAs as of the end of April each year; or
(d) Become subject to FSS audit review upon the conclusion of a joint audit inspection with a foreign supervisory authority or other supervisory concerns.
The Korean Institute of Certified Public Accountants performs quality control inspections on auditors that do not fall under the above-mentioned categories.
6.12 ACCOUNTING AND AUIT STANDARDS
Financial statements are prepared and presented in accordance with the accounting standards, while audits by external auditors are conducted in accordance with on audit standards. The FSC delegates the authority to set accounting standards to the Korea Accounting Institute under the oversight of the SFC. Following the announcement of a roadmap for the full adoption of the IFRS in March 2007, the IFRS became mandatory for all listed companies, unlisted financial institutions, and companies set to go public beginning in 2011. Auditors are required to perform audit in accordance with the auditing standards set by the Korean Institute of Certified Public Accountants. The standards follow the Clarified International Standards on Auditing set forth by the International Federation of Accountants.
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7 Consumer Protection
Consumer Protection Mandate
Information asymmetry tends to be more pronounced between the sellers and buyers of financial products and services than that between the sellers and buyers of manufactured goods or general consumer services. In addition, entry barriers set by regulation tends to create a mismatch in bargaining power between the sellers and buyers of financial products and services. Consumer protection is aimed at leveling the playing field and helping consumers overcome the disadvantages of insufficient expertise and bargaining power that hold them back from making informed decisions.
The FSS works to protect consumers. Consumer protection activities that the Financial Supervisory Service performs can be broadly divided into ex ante and ex post measures. Ex ante measures include such activities as enforcing standard contract provisions for financial products and services and disclosures and providing consumer counseling and financial literacy, while ex post measures refer to activities that are intended to rectify abuses and malpractices of financial service providers and help bring about remedy to consumers who are harmed by financial firms’ misconduct.
In May 2012, the FSS consolidated its consumer protection functions and established the Financial Consumer Protection Bureau (FCPB) in order to provide more effective consumer protection. The FCPB’s main responsibilities and functions are to administer consumer complaints, provide consumer counseling and dispute mediation services, and take supervisory actions on financial firms’ misconduct. In addition, the FCPB conducts wide-ranging financial education programs to help improve consumer financial literacy and help consumers make more informed decisions.
As part of its consumer protection mandate, the FCPB also evaluates financial firms’ consumer protection practices and consumer complaint administration systems. When deemed necessary, the FCPB may review complaints filed against financial firms and conduct on-site inspections. In respect of product and service disclosures, the FCPB works to improve financial firms’ disclosure standards and practices to help consumers
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make informed decisions. In addition, the FCPB also provides personal finance counseling services to help consumers exercise responsible and sound personal finance, management debt, and understand financial products.
While the FSS is the principal supervisory authority that carries out financial consumer protection, various government and public agencies including the KFTC, the KDIC, and Korea Consumer Agency and consumer advocacy and civic organizations perform similar services in certain consumer protection areas.
Consumer Complaint Mediation
The Financial Dispute Settlement Committee (FDSC) is a committee that has been created under the FCPB to help mediate and resolve complaints consumers file against financial firms.6 When a consumer files a complaint, the FCPB gathers and verifies the relevant facts and makes impartial recommendations to the parties involved to help them reach a mutually agreeable resolution without resorting to time-consuming and costly litigation through the court.
The FDSC is staffed by specialists that include independent outside experts. Each FDSC mediation meeting is attended by committee members who are selected by the FDSC chairperson on the basis of the specific areas of consumer complaints, which may vary from banking, nonbank, and financial investments to insurance.
Consumer complaint is referred to the FDSC when the parties involved in a complaint are unable to reach an agreement within 30 days from the day the request for FDSC mediation has been submitted. The FDSC then deliberates on the case and proposes a resolution within 60 days with due consideration given to the applicable rules and regulations and information provided by the parties involved. The FDSC may dismiss a complaint if it does not merit a mediated resolution from the FDSC, or the facts and information provided by the parties cannot be substantiated. The FDSC decides on a resolution proposal with a majority vote. Once an FDSC resolution proposal is accepted by the parties involved, no further recourse is available. Unlike arbitration, the FDSC recommendation is not legally binding, and adjudication through the court is still available to consumers and financial firms.
6 Financial Dispute Settlement Committee has also been translated as Financial Disputes Mediation Committee in some publications.
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Table 18.Financial Dispute Resolution Process
Complaint filed andreceived
Dispute settled Review and deliberation
Notification of themediation
[Admission and concession] [Dismissal]
Consultation withdispute resolution advisor
Dispute resolved beforereferral to the committee
Referral to thecommittee
Mediation rejected
Mediation notfinalized
Court litigation
Mediation accepted
Mediation finalized
Mediation agreementissued
Notification of dismissalto each party
Verification & review
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Appendices
A. Incorporation of Financial Service Company
Financial services companies must be incorporated and licensed in accordance with the applicable laws and regulations. For supervision purposes, the FSS classifies financial institutions into four general types: bank, nonbank financial institution, financial investment service provider, and insurance company.
A.1 REGISTRATION, AUTHORIZATION, AND APPROVAL
Unless specifically provided otherwise under the law, the incorporation of a financial services company requires FSC/FSS authorization, approval, or registration. Both authorization and approval are administrative actions that legally sanction a person (natural or legal) for a business activity. Although authorization and approval are similar in meaning and are often used interchangeably, authorization more narrowly means giving a person the permission to engage in a regulated business activity whereas approval more specifically means granting the full legal effect to a business activity. Some financial services businesses merely need to register with the FSC/FSS. Registration is approved without regulatory scrutiny when the applicant satisfies the established requirements.
A.2 REVIEW OF INCORPORATION APPLICATION
Authorization/approval for the incorporation of a financial services company is granted after a thorough review is performed of the incorporation application, especially in respect of the applicant’s legal form, the feasibility and viability of the applicant’s business plans, the availability of capital, the composition of the major shareholders, and the competence of the management.
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Table 19.Incorporation Requiring Registration, Authorization, or Approval
Registration
Financial Investment Service Provider
• Investment advisory company• Discretionary investment services company• Hedge fund
Insurance Company
•Intermediaries including insurance sales agent, agency, and broker•Actuary, claims adjuster•Others providing product development or claims payout services
Nonbank Financial Institution
•Leasing company•Installment finance company•New technology venture capital company
Authorization
Bank
•National bank, regional banks•Foreign bank branch
Financial Investment Service Provider
•Dealing•Brokerage•Collective investment services•Trust services
Nonbank Financial Institution
•Mutual savings bank•Credit union•Other deposit-taking institutions
Approval
Nonbank Financial Institution•Credit card company
Insurance Company•Life insurance•Nonlife insurance•Hybrid insurance
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A.2.1 Type of legal form proposed
As a rule, the incorporation of a financial service company is limited to a corporate form as recognized under the Commercial Act (the commercial code) with some exceptions provided for credit unions and several other smaller institutions.
A.2.2 Business feasibility and viability
For the assessment of the feasibility and viability of the application, extensive analysis and assessment of the financial soundness of the proposed business as a going concern are made. Assessments are also made on the prospect for the applicant’s long-term business viability and its competitive effect on the industry.
A.2.3 Business resources and operational capability
Human and business resources and operational capabilities that are available to effectively serve consumers and remain a going concern are another key review criterion. The appropriate levels of resources and operational capabilities may vary from industry to industry and the type of financial services to be offered. For services such as insurance requiring actuaries, claims adjusters and other specialists, the applicable laws and regulations specify the required employee levels.
A.2.4 Minimum incorporation capital requirements
Specific minimum capital requirements for the incorporation of a financial services company are set (Table 19). Note that authorization for financial investment service is granted for individual financial investment service businesses. Similarly, approval for insurance is granted for individual insurance business line.
A.2.5 Management and shareholder composition
The composition of the management and the shareholders proposed is reviewed not only for prudential reasons, but also for potential abuses by company insiders. The review of the applicant’s shareholders covers not only the individual organizers and major shareholders, but also persons specially related or connected to the shareholders and any other persons who may be able to exert undue influence on the management of the proposed company. The review extends to the shareholders’ ability to contribute capital to the company, their financial conditions, their past irregularities and rule violations, and the sources of funding for the proposed incorporation.
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Table 20.Minimum Incorporation Capital Requirements(Billions of KRW)
Bank
•National bank 100•National bank 25•Internet bank 25
Nonbank financial institution
•Specialized credit finance company 20 for credit card business only;20 for credit card business and one of the leasing business, installment finance business, and new technology venture business; 40 for three or four businesses including credit card business;20 for any or more than one of the leasing business, installment finance business, and new technology venture business without credit card business;
•Mutual savings bank 12 for a bank with the main office located in the Seoul Metropolitan City;8 for a bank with the main office located in one of the five metropolitan cities other than Seoul; 4 for others;
•Credit union (operating in metropolitan cities)
0.3 for region-specific credit union;0.1 for group-specific credit union;0.04 for workplace-specific credit union;
Financial investment service provider
•Dealing 1–90•Brokerage 0.5–20•Collective investment scheme 2–8•Trust service 5–25
Insurance company
•Full insurance business 30•Single insurance business 5•Branch of foreign insurance company 3
In accordance with the principle of separation of banking and commerce, acquiring ownership in a financial services company—especially in a deposit-taking institution such as a commercial bank or a mutual savings bank—is subject to enhanced regulatory review. The review is designed to prevent a few individuals, companies, and business groups from exercising undue influence on the credit decisions or the management of financial services companies and on market activities. The review of the proposed management also takes place with a particular emphasis on disqualifying causes and the ethical standards of the individual managers.
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A.2.6 Preliminary authorization/approval
In order to ensure a smooth and cost-effective authorization/approval process for the incorporation applicant, the incorporation rules provide for a preliminary authorization/approval. Where it is determined that the applicant unequivocally meets all of the authorization/approval requirements or an accelerated authorization/approval is warranted, the preliminary authorization/approval may be waived. The law provides for a transparent and expeditious incorporation process by imposing a specific length of time within which the review must be completed for both the preliminary and the final authorization/approval.
An applicant that satisfies all of the incorporation requirements must be promptly granted the authorization/approval sought. Where the authorized or approved company fails to comply with any of the incorporation requirements after receiving the authorization/approval, the FSC/FSS may revoke the authorization/approval.
A.3 AUTHORIZATION FOR FOREIGN BANK BRANCHES
A foreign bank seeking to open or close a bank branch or a representative office in Korea must obtain an appropriate authorization from the FSC/FSS. The authorization of a foreign bank branch may be withdrawn where the branch’s foreign-headquartered bank ceases to exist as a result of merger or other reasons, receives sanctions for improper or unlawful conduct, or suspends or terminates its banking business. Foreign bank branches must report all such occurrences to the FSC/FSS within seven days from the date of the occurrence. The banking license of a foreign bank branch is deemed to be revoked where the foreign-headquartered bank fails, loses its home banking license, terminates its banking business, or ceases to function as a going concern.
A.4 WITHDRAWL OF REGULATORY AUTHOIZATION/APPROVAL
The FSC/FSS is vested with the authority to revoke the business license of a financial services company. A financial services company pursuing major reorganization or alteration of its existing business structure must obtain prior authorization/approval from the FSC/FSS. Such business reorganization or alteration includes a breakup of the company, a merger with another financial services company, a whole or partial acquisition (or assignment) of a financial services business, the termination of a financial services business, and the dissolution of the company.
Where it is determined that a financial services company is unable to continue safe and sound business operation as a going concern, the FSC/FSS may issue a prompt corrective action and order a merger or the dissolution of the company through the sale of the company’s businesses.
The FSC/FSS may also revoke a business license where it is determined that a financial services company:
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(a) Obtained a business license through misrepresentation, deception, or fraud;
(b) Failed to comply with legal and regulatory requirements;
(c) Carried on financial services business while under FSC/FSS-imposed business suspension;
(d) Failed to comply with supervisory orders for remedial actions;
(e) Acquired or disposed of assets (such as debt and equity securities) through illegal means;
(f) Defaulted on a credit obligation and significantly disrupted the normal and orderly functioning of the financial market; or
(g) Will likely cause substantial financial losses to depositors or investors due to a grave legal or regulatory failure.
The FSC/FSS may also revoke the registration of a financial services firm for any of the aforementioned causes.
A.5 FINANCIAL FIRM OWNERSHIP
Ownership of a financial services company is regulated under the principle of the separation of banking and commerce to prevent financial services companies from operating under the undue influence of a select few individuals, companies, or business groups. However, non-depository financial services companies such as specialized credit finance companies are not subject to stringent ownership restrictions. Small-scale depositary institutions such as mutual savings banks and credit unions that are not particularly susceptible to abuse by the controlling shareholders are also subject to less stringent ownership regulations.
A.6 BANK SHARE OWNERSHIP
Restrictions on bank share ownership were first instituted in the Banking Act in December 1982 following a series of bank privatization initiatives as safeguards against large shareholders that may seek to profit from influencing the bank’s credit decisions. The key safeguard provision in the Banking Act is article 15(1) that expressly prohibits a “same party” from holding more than 10 percent of the outstanding voting shares of a national bank. (The limit is 15 percent for a regional bank.) Shares held by a shareholder mean shares that a person owns both legally and beneficially.
The Banking Act provides that the “same party” includes not only a shareholder of a bank, but also persons that are tied or connected to the shareholder by a special relationship (“related persons”) such as the shareholder’s family members or relatives. In addition, a company is deemed a related person to a shareholder of a bank if the
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shareholder’s family members or relatives hold more than 30 percent of the total shares of the company or effectively controls the company as its largest shareholders.
A.6.1 Exceptions to the 10 percent limit
The Banking Act provides several exceptions to the 10 percent limit on bank share ownership. Shares that are held by a government authority or the Korea Deposit Insurance Corporation are not subject to any share ownership restriction. Similarly, bank holding companies are excluded from any bank share ownership restrictions. The maximum share ownership permitted for the same party of a regional bank is 15 percent.
A.6.2 Disposition of excess shares
Where the number of shares held by the same party exceeds the 10 percent limit, the voting rights of the excess shares (the above-10 percent shares) are suspended, and full disposition of the excess shares must take place promptly. When the shareholder fails to fully dispose of the excess shares, the FSC/FSS may issue a disposition order for any remaining excess shares within a period of less than six months. Failure to comply with a disposition order by the FSC/FSS may result in a daily fine equivalent to 0.03 percent of the book value of the remaining excess shares.
A.6.3 Approval for excess shares
A same party seeking to acquire shares in excess of 10 percent must satisfy the excess share acquisition criteria as set forth in the Banking Act and in the subordinate regulations and obtain approval from the FSC/FSS. Approval must be obtained each time the aggregate number of shares held by the same party exceeds 10 percent (15 percent for a regional bank), 25 percent, and 33 percent of the outstanding voting shares of a national bank. The FSC/FSS has the authority under the law to approve excess share acquisition with a specific limit on its own discretion; any additional share acquisition thereafter must be approved again. The FSC conducts a review of bank shareholders’ compliance with the excess share acquisition requirements on a semiannual basis and on an ad hoc basis as needed.
Although the Banking Act and the subordinate regulations give exceptions to the 10 percent limit for the same party, they also require evaluation of the following considerations before additional share acquisition can be permitted pursuant to article 15(1) through (4) of the Banking Act.
• Risks the shareholder poses on the soundness of the bank;
• Shareholder’s asset size and financial soundness;
• Amount of credit, if any, that the bank has extended to the shareholder; and
• Shareholder’s capacity to contribute to the bank’s safety and soundness.
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A.7 BANK OWNERSHIP BY NON-FINANCIAL ENTITY
For a non-financial entity (NFE), the limit for share ownership in a national bank is 4 percent (15 percent in a regional bank).7 Exceptionally, it may also own up to 34 percent of an internet bank’s outstanding voting shares after it obtains approval from the FSC. The primary rationale for share ownership restrictions on an NFE is to prevent non-banking enterprises—mostly business groups that control companies engaging industrial enterprises—from unduly influencing the operation and management of a bank under the principle of the separation of banking and commerce.
A.7.1 Definition of Non-Financial Entity
An NFE is defined in the Banking Act as:
(a) A same party—a shareholder and related persons—whose aggregate capital from non-financial business entities exceeds 25 percent of the same party’s aggregate capital, or whose aggregate assets from non-financial business entities exceed KRW2 trillion;
(b) An investment company of which a person falling under subparagraph (a) above holds more than 4 percent of the investment company’s outstanding shares;
(c) A private equity fund (PEF) of which a person falling under either subparagraph (a) or (b) above is the PEF’s limited partner that holds, together with any related persons, 10 percent or more of the PEF’s paid-up capital;
(d) A PEF of which a person falling under either subparagraph (a) or (b) above is the PEF’s general partner;
(e) A PEF of which the aggregate equity of the affiliated companies of a business group that is subject to interlocking share-holding restrictions makes up 30 percent or more of the PEF’s paid-up capital; or
(f) A special-purpose company (SPC) of which a PEF falling under either subparagraph (c), (d), or (e) holds more than 4 percent of the SPC’s shares or equity and exercises de facto control over the management of the SPC.
A.7.2 Share acquisition above 4 percent
An NFE that seeks to acquire more than 4 percent of the outstanding voting shares of a national bank with the intent to become the bank’s largest shareholder or participate in the management of the bank (by influencing the
7 The term “non-financial entity” is translated as “non-financial business operator” in some publications.
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appointment of the bank’s directors or officers) must obtain approval from the FSC/FSS.
Where an NFE must obtain an ex post approval for shares acquired in excess of 4 percent under exceptional circumstances—such as share disposition by other shareholders or a capital write-down—the NFE must report the acquisition to the FSC/FSS within five business days from the date of the acquisition. The NFE must then either obtain approval from the FSC within six months from the date of the acquisition or dispose of the excess shares. Should the NFE fail to comply with the 4 percent limit within six months, the voting rights of the excess shares are suspended, and the FSC may issue a share disposition order for the excess shares.
A.7.3 NFE restrictions under the 4 percent share acquisition rule
As a rule, no NFE may hold more than 4 percent of the voting shares of a national bank; for a regional bank and an internet bank, the limit is 15 percent and 34 percent, respectively. The restriction may be raised up to 10 percent with approval from the FSC, provided that the NFE relinquishes the voting rights of the above-4 percent shares and meets the applicable financial soundness criteria.
A.7.4 Share acquisition in excess of 10 percent
An NFE may hold more than 10 percent of the voting shares of a national bank where:
(a) The NFE delivers to the FSC an intent to become a non-NFE within two years and obtains preliminary approval for the planned conversion to a non-NFE;
(b) The proportion of shares held by the NFE is not greater than the proportion of shares held by foreign investors as a group; this rule is applicable to a single bank only, and the voting rights become restricted, and the FSC may issue a share disposition order within one year for any excess holdings; or
(c) A fund created under article 5 of the National Finance Act or an entity managing such funds obtains approval from the FSC/FSS as an NFE.
A.7.5 Reporting of above 4 percent share ownership
A report on share ownership must be filed with the FSC/FSS within five business days as provided for under article 15 of the Banking Act when:
(a) A same party comes to hold more than 4 percent of the voting shares of a national bank;
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(b) A same party falling under subparagraph (a) above becomes the largest shareholder of the national bank;
(c) The aggregate equity of a same party falling under subparagraph (a) above increases or decreases by more than 1 percent;
(d) A change of a partner (either the general partner or a limited partner) of a PEF that holds more than 4 percent of the voting shares of a national bank occurs; or
(e) A change of a shareholder or a partner (either the general partner or a limited partner) of an SPC that holds more than 4 percent of the voting shares of a national bank occurs.
A.7.6 Restrictions on large shareholders
A shareholder of a bank classified as a large shareholder under the Banking Act is subject to certain share ownership restrictions. Article 2(1)10 of the Banking Act defines a large shareholder of a bank as:
(a) A shareholder that holds more than 10 percent of the voting shares of a national bank (15 percent for a regional bank); or
(b) A shareholder that holds more than 4 percent of the voting shares of a national bank and is either the largest shareholder of the bank or a shareholder that (i) effectively exerts influence on the bank’s management decisions through such means as appointing the bank’s directors or officers, or (ii) is an NFE that actively participates in the management of the bank through such means as appointing the bank’s directors or officers.
The maximum amount of credit that may be extended to a single large shareholder is the lower of either (i) an amount equivalent to 25 percent of the bank’s shareholders’ equity, or (ii) an amount equivalent to the proportion of the shareholder’s claim in the bank’s shareholders’ equity.
Where the amount of credit to be extended to a large shareholder exceeds the lower of either (i) 0.1 percent of the bank’s shareholders’ equity, or (ii) KRW5 billion, the bank must act to ensure that:
• A unanimous decision is reached from every member of the board of directors;
• The FSC/FSS is duly notified of the credit extension decision in advance; and
• Disclosure of the credit extension is made to the general public.
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Credit extension to large shareholders is restricted to 25 percent of the bank’s shareholders’ equity. Cross-lending involving a borrower from another bank, which is intended to circumvent the existing credit extension restrictions on large shareholders, is not permitted. (In a cross-lending scheme, Borrower 1 obtains the maximum credit allowed from Bank A, and Borrower 2 does the same from Bank B. Borrower 1 then obtains additional credit from Bank B and Borrower 2 from Bank A. The secondary credit extensions are then switched between the two borrowers.)
A.7.7 Restrictions on acquisition of shares issued by large shareholders
Bank acquisition of shares issued by a large shareholder is limited to 1 percent of the bank’s shareholders’ equity. For unlisted shares, the maximum is 0.5 percent. In addition, share acquisition in excess of the lower of either (i) 0.1 percent of the bank’s shareholders’ equity or (ii) KRW5 billion requires a unanimous vote of the board of directors of the bank, reporting to the FSC, and a public disclosure.
A.8 GOVERNANCE
The board of directors of a financial services company comprises executive directors, non-executive directors (non-executive inside directors), and outside directors (non-executive outside directors). Non-executive directors and outside directors are mutually exclusive. Non-executive directors do not take part in the day-to-day management decisions. Outside directors are independent of the management. They are appointed at the general shareholders’ meeting with the recommendation of the board’s director selection committee; outside directors must make up the majority of the director selection committee.
A.8.1 Composition of board of directors
Outside directors must make up at least three of the board members and the majority of the board for commercial banks. Outside directors must also make up at least three and at least half of the board members for financial investment service providers, insurance companies, and credit card companies with assets of KRW5 trillion or more is required to appoint the majority of the board with outside directors.
A.8.2 Persons ineligible for outside director
The following persons are ineligible to serve as an outside director of a financial services company:
(a) A minor;
(b) A person who has been declared mentally incompetent by the court;
(c) A person in bankruptcy;
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(d) A person with less than five years elapsed since the completion of a court-ordered prison sentence;
(e) A person with less than five years elapsed since being removed or discharged from employment for a breach of the Banking Act or any other financial laws and regulations;
(f) The largest shareholder and any persons specially related or connected to the shareholder;
(g) The spouse and children of a major shareholder;
(h) A current or former (during the previous two years) officer or employee (of either a financial services company or its subsidiary);
(i) The spouse and children of a current officer;
(j) A current or former (during the previous two years) officer or employee of a company with significant business relations with the financial services company; or
(k) A current officer or employee of a company where a current officer or employee of the financial services company serves as an outside director.
A.8.3 Outside director selection committee
Outside directors are selected with the recommendation of director selection committee made up of outside directors who constitute the majority of the selection committee. The selected candidates are then approved at the general shareholders’ meeting. (For listed companies, a person recommended by a shareholder who holds at least 1 percent of the company’s outstanding voting shares must be included in the candidate list. This measure is intended to strengthen minority shareholder rights and provide a check on large shareholders.)
A.8.4 Audit committee
An operating audit committee is mandatory for banks and financial services companies whose outside directors must constitute at least three and at least half of the board members. An audit committee requires a minimum of three directors, and a minimum of two-thirds (2/3) must consist of outside directors. For listed financial services companies whose assets at the most recent year-end financial reporting exceed KRW2 trillion, the audit committee must be headed by an outside director and include at least one director with accounting or financial expertise. For the commercial banks, a candidate selection committee made up entirely of outside directors must be formed for audit committee membership. The selected candidates may be presented to the general shareholders’ meeting
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for appointment only with the consent of the two-thirds (2/3) of the outside directors. The eligibility requirements for audit committee members are same as those for outside directors.
A.8.5 Internal controls and compliance
Together with the outside director and audit committee regimes, internal controls and compliance constitute the core of corporate governance structure. Whereas outside directors and audit committee are particularly applicable to large financial institutions, internal control standards and compliance regimes apply to all financial services companies irrespective of the size, the types of business, and the listed status.
For compliance, at least one compliance officer must be appointed to monitor internal control compliance, investigate any cases of noncompliance, and report them to the audit committee. A vote by the board of directors is required to appoint or discharge a compliance officer. Foreign bank branches may appoint a compliance officer without satisfying the board approval requirement.
B. Legal and Regulatory Structures
Financial statutes and regulations consist of laws enacted by the National Assembly, enforcement decrees approved by the president’s state council (cabinet), enforcement rules approved by the Office for Government Policy Coordination under the prime minister, and regulations written by the Financial Services Commission and the Financial Supervisory Service. Although enforcement decrees, enforcement rules, and supervisory regulations differ in hierarchy, they are all intended to implement and support specific statutes enacted by the National Assembly.
B.1 LAWS
A law is enacted by the National Assembly. It supersedes enforcement decrees, enforcement rules, and regulations that are written and enforced by the administrative agencies of the executive branch.
B.2 ENFORCEMENT DECREES AND ENFORCEMENT RULES
An enforcement decree, also called presidential enforcement decree, is a regulation immediately subordinate to laws. It is approved by the president’s state council (cabinet) to implement statutes enacted by the National Assembly. An enforcement rule is a regulation subordinate to enforcement decree and approved by the Office for Government Policy Coordination under the prime minister. Enforcement rules complement enforcement decrees with additional detailed rules in support of statutes enacted by the National Assembly. Laws passed by the National Assembly are not always accompanied by an enforcement decree and an enforcement rule.
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B.3 REGULATIONS AND DETAILED REGULATIONS
In respect of financial regulation and supervision, regulations are written by the FSC, a regulatory agency of the executive branch, to complement enforcement decrees and enforcement rules and ensure full enforcement of statutes. Regulations are subordinate to both enforcement decrees and enforcement rules. The Regulation on Supervision of Banking Business is thus subordinate to the Enforcement Decree of the Banking Act. Because the FSC and the FSS share financial regulation and supervision, the FSC assigns or delegates most of the enforcement functions such as investigation of unlawful securities trading to the FSS. Detailed regulations are written by the FSS in support of FSC regulations to ensure effective performance of supervisory duties and functions.
B.4 LEGAL AND REGULATORY STRUCTURES AND RULEMAKING PROCESS
The legal and regulatory structure for banking business is typical of the legal and regulatory structures for nonbank, securities, and insurance businesses. The statutes and regulations applicable to banking in descending hierarchy are:
(1) Banking Act, legislated and amended by the National Assembly;
(2) Enforcement Decree of the Banking Act, written and approved by the president’s cabinet;
(3) Regulation on Supervision of Banking Business, written and amended by the FSC; and
(4) Detailed Regulation on Supervision of Banking Business, written and amended by the FSS.
The underlying rationale for the hierarchical structures is that the Banking Act provides the broad legal basis for regulating banking business, and the subordinate enforcement decrees and regulations set forth specific provisions needed to enforce the Banking Act. As an example, the provisions of the Banking Act and the subordinate enforcement decrees and regulations pertaining to bank capital requirements vary in specificity as follows:
• Article 34 of the Banking Act requires banking institutions to comply with supervision standards and grants the FSC the authority to set the supervision standards.
• Article 20 of the Enforcement Decree of the Banking Act sets forth specific provisions to be included in the determination of supervision standards; the specific provisions pertain to bank capital standards and asset classification rules.
• Article 26 of the Regulation on Supervision of Banking Business provides that banking institutions must comply with the minimum standards for common
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equity tier 1 capital, tier 1 capital, and total regulatory capital and that the authority to set the specific minimum capital standards may be delegated by the FSC to the FSS.
• Article 17 of the Detailed Regulation on Supervision of Banking Business specifies the numerical ratios to be complied with in respect of common equity tier 1, tier 1 capital, and the total regulatory capital.
The rulemaking process is similar for most regulations. In general, when a rule is newly written or amended, it is subject to a 40-day public comment period and an independent review. After the rulemaking agency decides on the final rule, the new rule is officially promulgated before it takes effect (Figure 2).
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Figure 2.General Rulemaking Process
Banking Act Enforcement Decree of the Banking Act
Regulation on Supervision of Banking
Business
Detailed Regulation on Supervision of Banking
Business
v v v v
Draft Amendment Draft Amendment Draft Amendment Draft Amendment
v v v v
Regulatory Impact Analysis
Regulatory Impact Analysis
Inter-agency Consultation and
Coordination
Inter-agency Consultation and
Coordination
Announcement of Public Comment Period
No less than40 days
Announcement of Public Comment Period
No less than40 days
v v v v
Announcement of Public Comment Period
No less than40 days
Announcement of Public Comment Period
No less than40 days
Review of Regulatory Reform Committee
Review of Regulatory Reform Committee
v v v v
Review of Regulatory Reform Committee
Review of Regulatory Reform Committee
Approval by Financial Services Commission
Approval by Financial Supervisory Service
v v v v
Review of Ministry of Government
Legislation
Review of Ministry of Government
Legislation
Promulgation by Financial Services
Commission
Review of Financial Services Commission
v v v
Deliberation at Vice-Ministerial Meeting
and President’s State Council
Deliberation at Vice-Ministerial Meeting
and President’s State Council
Notice of Rule Change
v v
Deliberation and Approval by
National AssemblyApproval of President
v v
Public Promulgation Public Promulgation
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C. FSS Financial Statistics
The FSS regularly releases extensive information on financial services firms, the financial services industry, and the capital markets through the Financial Statistical Information System (FISIS) at http://efisis.fss.or.kr. Information available on FISIS can be grouped into statistics for individual financial services firms and the Monthly Financial Statistics Bulletin.
C.1 STATISTICS FOR FINANCIAL SERVICES FIRMS
Information on individual financial services firms is culled from Business Report filings—supervisory filings that financial services firms are required to submit to the FSC/FSS. Information can be searched by each individual financial sector—i.e., banking, nonbank, financial investment services, and insurance—or by each individual financial services firm. The Monthly Financial Statistics Bulletin is freely available on FISIS as an e-book in PDF.
Information available for financial services firms broadly covers the following four areas:
• General Information: Number of officers and employees, branches, and subsidiaries;
• Financial Statements: Summary financial statements, key funding and investment activities, and income and expenses;
• Soundness Indicators: Capital ratio, asset quality, ROA, ROE, and liquidity ratio; and
• Business Activities: Deposit and lending, insurance premium, securities trading and fees and commissions, and credit card purchases.
C.2 MONTHLY FINANCIAL STATISTICS BULLETIN
The FSS publishes the Monthly Financial Statistics Bulletin each month to cover wide-ranging financial industry and market statistics. The monthly bulletin covers the following four areas:
• Key Economic Indicators: Money supply, trade balances, foreign exchange reserves, interest rates, industrial activity indexes, stock indexes in major markets, and GDP;
• Financial Sector Comparison: Comparison of financial service providers (banks, securities companies, insurance companies, and others) by the number of companies, the number of employees, assets, capital, net income, deposits, and SBLs or loans classified as substandard or below;
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• Financial Sector Statistics: Sector-by-sector financial conditions, income and expenses, key business indicators, and SBLs; and
• Capital Market Statistics: Funding activities, corporate bond issues, key KOSPI and KOSDAQ indexes, key derivatives indexes, and foreign investors’ stock purchases.
D. FSS DART
DART—short for Data Analysis, Retrieval, and Transfer—is the online corporate disclosure filing system that the FSS operates to enable companies to electronically file documents and make other information disclosures. All DART filings are immediately made available to the public free of charge via the FSS DART Internet homepages at dart.fss.or.kr (Korean) and englishdart.fss.or.kr (English).
D.1 KEY DEVELOPMENTS
The development of DART began to take shape in early 1998. First launched in March 1999, DART became compulsory and replaced offline paper filings in January 2001; the English DART website opened in February 2007. DART continued to advance with the integration of XBRL-based reporting in 2007 and IFRS-based XBRL reporting in 2010. The FSS also started providing mobile DART service in 2012 and open API service in 2013.
D.2 FILINGS IN ENGLISH
Filings in English are not compulsory, but large publicly held companies often provide them on a voluntary basis for the benefit of their foreign shareholders and investors. Information available at the FSS English DART website include filings made to foreign exchanges by internationally active domestic companies, filings from the KRX (from the Stock Market Division and from the KOSDAQ Market Division), and corporate information provided by the Korea Listed Companies Association including company profile, major shareholder information, and financial information can also be accessed from DART.
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E. Selected Financial Sector Data
1. Banking Sector Data: E1 – E25
2. Insurance Sector Data: E26 – E34
3. Financial Investment Service Sector Data: E35 – E47
4. Nonbank Sector Data: E48 – E61
5. Foreign Debt and Equity Investment Data: E62 – E69
6. Other Selected Data: E70 – E79
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1. Banking Sector Data
E.1 BanksAssets, Loans, and Deposit(Trillions of KRW)
2018 2019
Assets 2,935.0 3,167.6
Loans 1,739.3 1,850.1
Household 713.2 767.8
Corporate 857.7 906.5
Deposits 2,016.3 2,162.8
Banking accounts 1,778.6 1,904.8
Trust accounts 237.7 258.0
Source: FSS 2019 Annual Report;
E2. BanksFinancial Soundness Indicators(Amount in trillions of KRW, ratio in percent)
2018 2019
Net income 13.9 13.9
Income before loan-loss provisions 23.3 23.3
SBL ratio 0.97 0.97
Capital ratio 15.36 15.36
ROA 0.56 0.56
ROE 7.10 7.10
Source: FSS 2019 Annual Report;
Note: Bank loans are classified into one of five categories: (i) normal; (ii) precautionary; (iii) substandard; (iv) doubtful; or (v) presumed loss. Substandard or below loans (“SBLs”) refer to loans classified as substandard, doubtful, or presumed loss. The ratio of loans classified as substandard or below (“SBL ratio”) is the ratio of sum of loans classified as substandard, doubtful, or presumed loss.
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E3. BanksTrust Assets under Management(Trillions of KRW)
2018 2019
Money trust 237.7 258.0
Specified 221.4 241.5
Unspecified 16.3 16.5
Property trust 196.1 218.2
Accounts receivable 155.4 167.4
Real estate 39.7 50.2
Securities 1.0 0.6
Others 0.0 0.1
Total 433.8 476.3
Source: FSS 2019 Annual Report;
Note: For accounting purposes, bank assets fall under one of four accounts—banking account, trust account, merchant banking account, or inter-account; banking account is used for deposit-taking and lending and trust account for customer assets managed through bank trust services.
E4. BanksOperating Income from Trust Asset Management Services(Billions of KRW)
2018 2019
Money trust 1,116.4 1,204.6
Specified 1,036.1 1,123.6
Unspecified 80.3 81.0
Property trust 65.0 78.4
Accounts receivable 24.1 28.4
Real estate 40.7 49.7
Securities 0.3 0.3
Others 0.1 0.0
Total 1,181.6 1,283.0
Source: FSS 2019 Annual Report;
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E5. BanksIncome(Trillions of KRW)
2018 2019
Year Year Q1 Q2 Q3 Q4
Commercial banks 9.6 10.1 2.5 3.0 3.1 1.4
National banks 8.6 9.0 2.2 2.7 2.8 1.3
Regional banks 1.0 1.1 0.3 0.4 0.3 0.1
Internet banks -0.1 -0.1 -0.0 -0.0 -0.0 -0.0
Specialized banks 6.1 4.4 1.4 1.4 0.6 0.9
Total 15.6 14.4 4.0 4.4 3.7 2.3
Source: FSS 2019 press releases;
Note: The five specialized banks are the Korea Development Bank, the Export-Import Bank of Korea, the Industrial Bank of Korea, NongHyup Bank of the National Agricultural Cooperative Federation, and Suhyup Bank of the National Federation of Fisheries Cooperatives.
E6. BanksLoan Loss Expenses(Trillions of KRW)
2018 2019
Year Year Q1 Q2 Q3 Q4
Loan loss expenses 4.4 3.7 0.7 0.6 1.5 1.0
Source: FSS 2019 press releases;
E7. BanksInterest Income(Amount in trillions of KRW, NIM and margin in percent)
2018 2019
Year Year Q1 Q2 Q3 Q4
Interest income 40.5 40.7 10.1 10.3 10.2 10.1
NIM 1.67 1.56 1.62 1.61 1.55 1.46
Loan-deposit margin 2.06 1.95 2.02 2.01 1.94 1.83
Source: FSS 2019 press releases;
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E8. BanksSummary Income Statement(Trillions of KRW)
2018 2019Year Year Q1 Q2 Q3 Q4
Interest income 40.5 40.7 10.1 10.3 10.2 10.1
Interest revenue 71.0 75.5 18.8 19.2 19.0 18.5
Interest expense 30.5 34.8 8.7 8.9 8.8 8.4
Non-interest income 5.6 6.6 1.8 1.6 1.6 1.6
Service fees/commissions 4.8 5.2 1.2 1.3 1.3 1.4
Trust service income 1.3 1.4 0.3 0.4 0.3 0.3
Securities-related income 1.5 2.3 0.9 0.5 0.6 0.3
Securities trading 0.5 101 0.3 0.2 0.4 0.1
Valuation gains 0.3 0.3 0.2 0.1 -0.0 -0.1
Dividend income 0.7 0.9 0.3 0.2 0.2 0.2
FX-derivatives income -2.0 -2.3 -0.7 -0.6 -0.6 -0.4
Income on loan sales 0.3 0.2 0.1 0.1 0.0 -0.1
Total income 46.0 47.3 11.8 11.9 11.8 11.7
Selling and administrative expenses 22.8 23.7 5.7 5.5 5.6 6.8
Operating income before provision for loan losses 23.2 23.7 6.2 6.4 6.2 4.9
Provision for loan losses 4.4 3.7 0.7 0.6 1.5 1.0
Operating income 18.8 19.9 5.5 5.8 4.7 3.9
Nonoperating income 1.8 -0.5 -0.4 0.3 0.3 -0.7
Subsidiaries-related income 2.3 -0.2 -0.2 -0.0 0.1 -0.0
Income tax 5.0 5.0 1.1 1.6 1.3 0.9
Net income under K-IFRS 15.6 14.4 4.0 4.4 3.7 2.3
Regulatory adjustment to provision for loan losses 0.7 1.6 0.5 0.3 0.4 0.4
Net income 14.9 12.9 3.5 4.1 3.3 1.9
Source: FSS 2019 press releases;
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E9. BanksCapital Ratios (Percent)
Q4, 2018 Q4, 2019CET 1 Tier 1 Total CET 1 Tier 1 Total
Shinhan 12.89 13.29 16.03 12.75 13.30 15.91
Woori 11.15 13.18 15.65 10.96 13.15 15.38
Standard Chartered 14.38 14.38 14.42 14.78 14.78 16.89
Hana 13.79 13.90 16.25 13.80 13.88 16.12
Citibank Korea 18.18 18.18 18.93 18.76 18.76 18.76
Kookmin 14.33 14.33 15.52 14.38 14.68 15.85
National banks 13.37 13.92 15.94 13.36 14.04 16.04Daegu 11.53 13.54 15.08 10.96 12.90 14.42
Busan 12.73 13.77 16.21 12.80 14.08 16.12
Gwangju 13.29 13.91 16.97 13.32 13.77 16.02
Jeju 10.35 11.61 14.89 10.63 11.85 14.91
Jeonbuk 11.12 11.17 14.17 11.41 11.47 14.12
Gyongnam 11.79 13.46 16.30 11.46 12.90 15.34
Regional banks 12.04 13.32 15.76 11.88 13.16 15.26K Bank - 15.94 16.53 - 10.09 10.88
Kakao Bank - 13.49 13.85 - 13.14 13.48
Internet banks - 13.83 14.22 - 12.82 13.21
Commercial banks 13.19 13.84 15.90 13.16 13.91 15.90Korea Development Bank 12.69 12.69 14.80 12.05 12.05 13.97
Industrial Bank of Korea 10.24 11.90 14.50 10.30 11.97 14.47
Export-Import Bank of Korea 12.73 12.73 14.42 12.75 12.75 14.48
National Agricultural Cooperative Federation 12.49 12.75 15.54 12.47 12.65 15.19
National Federation of Fisheries Cooperatives 10.76 11.70 13.63 10.61 12.32 13.59
Specialized banks 11.96 12.47 14.75 11.71 12.24 14.35
Aggregate ratio 12.66 13.25 15.41 12.54 13.20 15.25
Source: FSS 2019 press releases;
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E10. Domestic BanksForeign Currency Liquidity Coverage Ratio(Rate and ratio in percent, spread in basis points)
2018 2019
Year Year Q1 Q2 Q3 Q4
Foreign currency LCR 118.2 121.1 113.4 111.4 125.9 121.1
Stable funding ratio 152.0 140.5 147.9 140.2 142.3 140.5
Interest rate spread
Short-term 4.5 5.7 1.9 7.2 7.4 5.6
Mid-to-long term(over one year) 56.3 53.2 57.6 62.7 37.7 46.7
Rollover rate
Short-term 123.8 95.0 76.2 104.9 104.3 93.2
Mid-to-long term(over one year) 122.5 96.7 128.0 91.0 74.3 103.3
5-year CDS spread 39 22 34 32 33 22
Source: FSS 2019 Annual Report;
E11. BanksBanks: Total, Tier 1, and CET 1 Ratios(Percent)
2017 2017 2019
Year Year Sept Dec
Tier 1 13.12 13.25 13.36 13.20
Total 15.24 15.41 15.40 15.25
Total 15.24 15.41 15.40 15.25
Source: FSS 2019 press releases;
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E12. BanksSBL Ratio by Assets(Percent)
2018 2019
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Business loans 1.75 1.56 1.40 1.43 1.43 1.32 1.23 1.10
Large companies 2.84 2.46 2.02 2.10 2.12 1.95 1.66 1.50
SMEs 1.13 1.04 1.04 1.05 1.05 0.97 1.00 0.89
Household loans 0.25 0.24 0.23 0.23 0.25 0.25 0.26 0.25
Mortgage loans 0.19 0.19 0.18 0.17 0.19 0.19 0.20 0.19
Unsecured loans 0.38 0.36 0.36 0.36 0.40 0.39 0.40 0.37
Credit card assets 1.39 1.33 1.34 1.20 1.34 1.38 1.40 1.12
Aggregate ratio 1.18 1.06 0.96 0.97 0.98 0.91 0.86 0.77
Source: FSS 2019 press releases;
Note: Bank loans are classified into one of five categories: (i) normal; (ii) precautionary; (iii) substandard; (iv) doubtful; or (v) presumed loss. Substandard or below loans (“SBLs”) refer to loans classified as substandard, doubtful, or presumed loss. The ratio of loans classified as substandard or below (“SBL ratio”) is the ratio of sum of loans classified as substandard, doubtful, or presumed loss.
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E13. BanksSBLs and SBL Ratios(Amount in trillions of KRW, ratio in percent)
Q4, 2018 Q4, 2019
SBLs Aggregate loans
SBL ratio SBLs Aggregate
loansSBL ratio
Shinhan 1.1 236.6 0.45 1.1 254.1 0.45
Woori 1.2 233.9 0.51 1.0 243.1 0.40
Standard Chartered 0.2 37.7 0.46 0.2 40.9 0.42
Hana 1.2 232.0 0.52 1.0 249.3 0.39
Citibank Korea 0.2 23.2 0.70 0.2 22.9 0.74
Kookmin 1.3 274.5 0.48 1.1 288.9 0.37
National banks 5.1 1,037.9 0.49 4.5 1,099.1 0.41Daegu 0.3 36.9 0.90 0.3 40.8 0.73
Busan 0.6 41.4 1.43 0.4 43.7 0.87
Gwangju 0.1 17.9 0.63 0.1 18.4 0.49
Jeju 0.0 4.8 0.49 0.0 5.0 0.53
Jeonbuk 0.1 14.0 0.71 0.1 13.8 0.64
Gyongnam 0.3 30.7 1.11 0.3 31.0 0.96
Regional banks 1.5 145.7 1.03 1.2 152.7 0.77K Bank 0.0 1.3 0.67 0.0 1.4 1.41
Kakao Bank 0.0 9.1 0.13 0.0 14.9 0.22
Internet banks 0.0 10.3 0.20 0.1 16.3 0.32Commercial banks 6.6 1,194.0 0.56 5.7 1,268.1 0.45Korea Development Bank 5.2 121.7 4.23 3.4 128.3 2.67
Industrial Bank of Korea 2.7 206.2 1.32 2.8 220.0 1.28
Export-Import Bank of Korea 1.6 104.4 1.50 1.8 103.0 1.79
National AgriculturalCooperative Federation 1.9 216.4 0.89 1.3 227.7 0.58
National Federation of Fisheries Cooperatives 0.2 29.9 0.56 0.2 33.5 0.46
Specialized banks 11.5 678.6 1.70 9.6 712.5 1.34Aggregate ratio 18.2 1,872.6 0.97 15.3 1,980.6 0.77
Source: FSS 2019 press releases;
Note: Bank loans are classified into one of five categories: (i) normal; (ii) precautionary; (iii) substandard; (iv) doubtful; or (v) presumed loss. Substandard or below loans (“SBLs”) refer to loans classified as substandard, doubtful, or presumed loss. The ratio of loans classified as substandard or below (“SBL ratio”) is the ratio of sum of loans classified as substandard, doubtful, or presumed loss.
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E14. BanksDomestic Banks’ Overseas Businesses by Region
2018 2019 (%)
Asia (20 countries) 130 135 69.2
China 16 16 8.2
Hong Kong 11 11 5.6
Japan 8 9 4.6
ASEAN (9 countries) 77 81 41.5
Vietnam 19 19 9.7
India 15 16 8.2
Myanmar 12 14 7.2
Cambodia 10 10 5.1
Indonesia 8 9 4.6
Other Asian countries 18 18 9.2
Americas (5 countries) 27 27 13.8
U.S. 15 15 4.6
Others 12 12 6.2
Europe (9 countries) 25 25 12.8
Other regions (5 countries) 8 8 4.1
Total 190 195 100.0
Source: FSS 2019 Annual Report;
E15. BanksAssets from Overseas Businesses by Asset Class(Billions of USD)
2018 2019
Cash and deposits 114.81 133.69
Securities 16.21 17.57
Loans 11.16 14.18
Bills brought in foreign currency 57.13 70.83
Interbank loans 4.19 3.97
Accounts from headquarters 5.37 5.12
Total 12.39 12.29
Source: FSS 2019 press releases;
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E16. BanksAssets from Overseas Businesses by Country(Billions of USD)
2018 2019
China 26.43 27.40
Hong Kong 15.42 18.26
U.S. 14.49 16.59
Japan 11.35 14.18
U.K. 10.82 12.51
ASEAN 23.59 30.47
Vietnam 6.43 8.56
Indonesia 6.34 7.80
Singapore 6.13 7.53
Others 12.71 14.29
Total 114.81 133.69
Source: FSS 2019 Annual Report;
E17. BanksSBLs and SBL Ratio of Domestic Banks’ Overseas Businesses by Country(Billions of USD)
SBLs SBL ratio (%)
2018 2019 2018 2019
China 134 107 0.87 0.62
Hong Kong 17 36 0.22 0.37
U.S. 17 44 0.23 0.46
Japan 30 19 0.38 0.19
U.K. 0 2 0.01 0.04
ASEAN 139 262 0.78 1.21
Vietnam 8 25 0.21 0.52
Indonesia 78 163 1.53 2.76
Singapore 15 25 0.30 0.39
Others 78 59 0.95 0.61
Total 416 529 0.60 0.63
Source: FSS 2019 Annual Report;
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E18. Financial Holding CompaniesConsolidated BIS Capital Ratio(Percent)
2018 2019
Interest income 1,887.4 2,064.6
Non-interest income 711.2 716.9
Commissions 321.2 349.9
Securities 27.5 43.0
Foreign exchange derivatives 130.8 101.6
Total profits 2,598.6 2,781.5
Selling and administrative expenses 1,084.5 1,202.5
Bad debt expenses 228.6 322.8
Corporate income tax 281.9 268.6
Nonoperating income -19.8 0.4
Net income 983.9 988.0
Source: FSS 2019 press releases;
E19. Banks Net Income from Overseas Businesses by Country(Millions of USD)
2018 2019
China 153.8 101.1
Hong Kong 174.6 149.1
U.S. 63.1 82.9
Japan 90.0 99.3
U.K. 68.4 80.7
ASEAN 330.8 364.4
Vietnam 133.0 155.6
Indonesia 87.1 51.9
Singapore 47.2 53.1
Others 103.2 110.5
Total 983.9 988.0
Source: FSS 2019 Annual Report;
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E20. Bank Holding CompaniesCapital Ratios(Percent)
Q4, 2018 Q4, 2019CET 1 Tier 1 Total CET 1 Tier 1 Total
Shinhan Financial Group 12.55 13.42 14.87 11.12 12.34 13.90
Shinhan 12.89 13.29 16.03 12.75 13.30 15.91
Jeju 10.35 11.61 14.89 10.63 11.85 14.91
Hana Financial Group 12.86 13.52 14.93 11.96 12.67 13.95
Hana 13.79 13.90 16.25 13.80 13.88 16.12
KB Financial Group 13.97 13.97 14.60 13.58 13.86 14.48
Kookmin 14.33 14.33 15.52 14.38 14.68 15.85
Woori - - - 8.39 9.85 11.89
Woori 11.15 13.18 15.65 10.96 13.15 15.38
DGB Financial Group 9.80 11.32 12.82 9.54 10.92 12.32
Daegu 11.53 13.54 15.08 10.96 12.90 14.42
BNK Financial Group 9.55 10.98 13.15 9.54 11.13 12.95
Busan 12.73 13.77 16.21 12.80 14.08 16.12
Gyeongnam 11.79 13.46 16.30 11.46 12.90 15.34
JB Financial Group 9.02 10.42 12.73 9.67 11.17 13.16
Jeonbuk 11.12 11.17 14.17 11.41 11.47 14.12
Gwangju 13.29 13.91 16.97 13.32 13.77 16.02
NH Financial Group 11.08 12.05 13.86 11.28 12.32 14.01
Nonghyup 12.49 12.75 15.54 12.47 12.65 15.19
Korea Investment Holdings - 11.29 11.67 - - -
Kakao Bank - 13.49 13.85 - 13.14 13.48
Aggregate ratio 12.29 12.93 14.27 11.10 12.10 13.54
Source: FSS 2019 press releases;
Note: The figures for Korea Investment Holdings are based on Basel I, and its CET 1 ratio is not calculated.
E21. Financial Holding CompaniesNumber, Subsidiaries, and Employees
2018 2019
Number of financial holding companies 9 10
Number of subsidiaries 209 243
Number of employees 121,125 154,127
Source: FSS 2019 press releases;
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E23. Financial Holding CompaniesConsolidated BIS Capital Ratio(Percent)
2018 2019
Total capital ratio 14.38 13.54
Tier 1 capital ratio 13.00 12.10
CET 1 capital ratio 12.29 11.10
Source: FSS 2019 press releases;
E24. Financial Holding CompaniesSBL and Loan Loss Provision Ratios(Percent)
2018 2019
SBL ratio 0.74 0.58
Loan loss provision ratio 116.77 123.29
Source: FSS 2019 press releases;
E25. Financial Holding CompaniesDebt and Double Leverage Ratios(Percent)
2018 2019
Debt ratio 32.22 29.04
Double leverage ratio 122.86 120.26
Source: FSS 2019 press releases;
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2. Insurance Sector Data
E26. Insurance CompaniesNet Income(Billions of KRW)
2018 2019
Life insurance companies 4,032.5 3,114.0
Insurance income (net of policy reserves) -23,637.8 -24,419.8
Investment income 24,112.9 23,901.4
Other incomes 4,873.5 4,470.8
Nonlife insurance companies 3,253.8 2,222.7
Insurance income -3,132.1 -6,021.1
Investment income 7,736.2 9,129.4
Other incomes -193.1 -94.2
Net income 7,286.3 5,336.7
Source: FSS 2019 press releases;
E27. Insurance CompaniesPremium Income(Billions of KRW)
2018 2019
Life insurance companies 110,843.1 117,262.4
Protection-type insurance 41,483.9 43,208.4
Savings-type insurance 33,652.2 31,728.0
Retirement pension and others 35,707.0 42,326.0
Nonlife insurance companies 91,066.1 95,498.0
Auto insurance 50,571.5 53,097.5
Auto insurance 16,720.2 17,567.7
Long-term nonlife insurance 9,476.9 9,850.4
Retirement pension and others 14,297.5 14,982.4
Total 201,909.2 212,760.4
Source: FSS 2019 press releases;
133
E28. Insurance CompaniesAssets and Shareholders’ Equity(Billions of KRW)
2018 2019
Assets 1,155,238.8 1,238,916.9
Life insurance companies 857,198.3 918,165.6
Nonlife insurance companies 298,040.5 320,751.3
Shareholders’ equity 112,197.3 129,986.5
Life insurance companies 73,996.7 87,041.4
Nonlife insurance companies 38,200.6 42,945.1
Source: FSS 2019 press releases;
E29. Insurance CompaniesROA and ROE(Percent)
2018 2019
ROA 0.64 0.45
Life insurance companies 0.48 0.35
Nonlife insurance companies 1.13 0.72
ROE 6.66 4.41
Life insurance companies 5.55 3.87
Nonlife insurance companies 8.86 5.48
Source: FSS 2019 press releases;
E30. Life and Nonlife Insurance CompaniesSolvency Margin (Percent)
2018 2019
Life insurance companies 271.3 284.6
Nonlife insurance companies 242.6 241.1
Total 261.2 269.5
Source: FSS 2019 Annual Report;
134
E31. Life and Nonlife Insurance CompaniesAssets (Trillions of KRW)
2018 2019
Life insurance companies
Insurance accounts 706.2 750.5
Operating assets 829.0 888.5
- Investment securities 643.3 694.1
- Loan assets 151.1 158.6
- Others 34.6 35.8
Nonoperating assets 28.2 29.6
Special accounts 151.0 167.6
Total assets 857.2 918.2
Nonlife insurance companies
Insurance accounts 272.2 292.6
Operating assets 266.4 286.5
- Investment securities 176.9 194.4
- Loan assets 72.2 75.8
- Others 17.3 16.3
Nonoperating assets 31.6 34.2
Special accounts 25.9 28.1
Total assets 298.0 320.7
Aggregate
Insurance accounts 978.4 1,043.2
Operating assets 1,095.4 1,175.1
- Investment securities 820.3 888.5
- Loan assets 223.3 234.4
- Others 51.8 52.1
Nonoperating assets 59.8 63.9
Special accounts 176.8 195.7
Total assets 1,155.2 1,238.9
Source: FSS 2019 Annual Report;
135
E32. Insurance CompaniesNumber of Insurance Companies’ Overseas Businesses
2018 2019Life Nonlife Total Life Nonlife Total
Subsidiaries 6 19 25 6 181 24
Local branches - 10 10 - 10 10
Total 12.29 12.93 14.27 11.10 12.10 13.54
Source: FSS 2019 press releases;
Note: Samsung Fire & Marine Insurance closed its Brazil operations in June 2019.
E33. Insurance CompaniesNet Income of Insurance Companies’ Overseas Businesses by Sector(Millions of USD)
Life Nonlife Total2018 2019 2018 2019 2018 2019
Insurance -7.5 19.9 30.0 52.0 22.5 71.9
Investment -0.2 -2.1 0.4 0.1 0.2 -2.0
Total -7.7 17.8 30.4 52.1 22.7 69.9
Source: FSS 2019 press releases;
E34. Insurance CompaniesFinancial Statement of Insurance Companies’ Overseas Businesses by Sector(Millions of USD)
Life Nonlife Total2018 2019 2018 2019 2018 2019
Assets 1,590 1,830 3,005 3,463 4,595 5,293
Liabilities 554 698 2,064 2,393 2,618 3,091
Policy reserve 473 611 1,528 1,521 2,001 2,132
Total 1,036 1,132 941 1,070 1,977 2,202
Source: FSS 2019 press releases;
136
3. Financial Investment Service Sector Data
E35. Securities CompaniesIncome (Billions of KRW)
2018 2019
Year Year Q1 Q2 Q3 Q4
Commissions income 9,716.0 9,490.2 2,242.2 2,477.5 2,221.6 2,548.9
Brokerage commissions 4,542.6 3,463.6 891.3 8947. 821.1 856.5
IB commissions 2,661.2 3,412.2 763.3 894.2 749.5 1,005.2
Wealth management 1,012.8 1,058.1 256.2 298.0 255.6 248.3
Others 1,499.4 1,556.4 331.5 390.6 395.4 438.9
Proprietary income 4,517.1 3,679.6 728.8 1,077.0 996.6 877.2
Stock-related -17.8 529.5 260.8 -25.6 50.9 243.4
Bond-related 6,187.2 6,748.0 2,060.4 2,352.1 1,858.7 476.8
Derivatives-related -1,652.3 -3,597.9 -1,592.5 -1,249.4 -913.0 157.0
Other income from assets 1,637.7 4,091.2 1,479.1 937.6 791.8 882.7
FX-related 60.9 255.8 128.1 176.1 172.2 -220.6
Loan-related 2,408.9 2,614.4 648.7 731.2 648.5 586.0
Funds-related -832.1 1,221.0 702.4 30.3 -29.0 517.3
Other income -2,074.8 -2,083.2 -359.5 -448.0 -615.1 -660.6
Selling and admin expenses 8,377.3 8,916.0 2,208.8 2,252.2 2,132.6 2,322.4
Net income 4,166.7 4,910.4 1,465.7 1,384.0 987.1 1,073.6
Source: FSS 2019 press releases;
137
E36. Securities CompaniesFinancial Positions (Trillions of KRW)
2018 2019
Assets 438.7 482.6
Cash & deposits 76.5 73.5
Securities 273.4 316.7
Loans 46.9 48.9
Liabilities 382.2 420.8
Customer deposits 42.4 47.4
Repurchase agreements 107.9 121.7
Structured derivatives 110.7 113.2
Bills payable 6.0 12.9
Shareholders’ equity 56.6 61.8
Capital stock 17.8 18.5
Retained earnings 20.5 23.6
Source: FSS 2019 Annual Report;
E37. Securities CompaniesNet Capital Ratio(Amount in trillions of KRW, ratio in percent)
2018 2019
Net operating capital 44.2 51.4
Risk amount 18.9 25.6
Compulsory ongoing capital 4.6 4.6
Net capital ratio 547.4 559.1
Source: FSS 2019 Annual Report;
138
E38. Securities CompaniesOverseas Businesses by Country
Subsidiaries Offices Total
Asia 39 14 53
China 5 9 14
Hong Kong 8 - 8
Indonesia 8 - 8
Vietnam 6 2 8
Singapore 6 - 6
Japan - 3 3
Others1 6 - 6
U.S. 9 - 9
Others2 4 1 5
Total 52 15 67
Source: FSS 2019 press releases;
Notes: 1 Includes Myanmar (2), Thailand, Cambodia, Mongolia, and India; 2 Includes the U.K. (4) and Brazil (1);
E39. Securities CompaniesAssets, Liabilities, and Shareholders’ Equity of Overseas Businesses(Billions of USD)
2018 2019
Assets 49.49 58.47
Liabilities 44.76 52.65
Shareholders’ equity 4.73 5.82
Source: FSS 2019 press releases;
E40. Futures CompaniesNet Income and ROE(Amount in billions of KRW, ROE in percent)
2018 2019
Year Year Q1 Q2 Q3 Q4
Brokerage commission 112.0 116.6 27.1 29.5 32.0 28.0
Proprietary income 8.5 9.0 2.3 2.0 2.1 2.6
Proprietary income 23.3 26.1 7.0 7.6 7.2 4.3
ROE 6.8 6.5 - - - -
Source: FSS 2019 press releases;
139
E41. Futures CompaniesFinancial Position(Billions of KRW)
2018 2019
Assets 4,610.2 3,158.1
Cash & cash deposits 4,095.9 2,707.3
Securities 217.5 295.3
Liabilities 4,234.8 2,724.9
Customer deposits 4,180.2 2,650.6
Shareholders’ equity 375.4 433.2
Capital stock 108.5 134.5
Retained earnings 212.2 240.8
Source: FSS 2019 Annual Report;
E42. Asset Management CompaniesNet Income (Billions of KRW)
2018 2019
Operating income 815.1 982.6
Operating revenue 2,821. 0 3,068. 3
Operating expense 2,005.8 2,085.7
Non-operating income -15.5 115.5
Non-operating revenue 67.0 172.7
Non-operating expense 82.5 57.1
Net income 596.2 845.4
Source: FSS 2019 Annual Report;
E43. Asset Management CompaniesNet Income & ROE(Amount in billions of KRW, ROE in percent)
2018 2019
Net income 596.2 845.4
ROE 10.1 12.5
Source: FSS 2019 press releases;
140
E44. Asset Management CompaniesIndirect Investment Assets(Trillions of KRW)
2018 2019
Fund assets 551.0 649.6
Private Equity 333.2 412.4
Public Equity 217.8 237.2
Discretionary assets 467.7 486.9
Total 1,114.5 1,136.5
Source: FSS 2019 press releases;
E45. Asset Management CompaniesAsset Management Companies: Fund Assets under Management(Trillions of KRW)
2018 2019
Equity funds 85.2 87.7
Bond funds 101.8 117.5
Hybrid funds 28.1 25.3
MMFs 89.6 104.9
Real estate funds 75.5 98.3
Special asset funds 71.1 93.2
Others 99.7 112.7
Total 551.0 649.6
Source: FSS 2019 Annual Report;
E46. Asset Management CompaniesSummary Financial Positions(Billions of KRW)
Dec 2018 Dec 2019
Assets 7,673.0 9,438.8
Cash and deposits 2,026.0 2,301.1
Securities and derivatives 4,635.2 5,812.7
Securities 4,629.4 5,810.2
Derivatives 5.8 2.4
Others 1,011.7 1,325.1
Liabilities 1,562.5 1,990.2
Shareholder’s equity 6,110.4 7,448.6
Capital 2,193.3 2,313.4
Source: FSS 2019 press releases;
141
E47. Asset Management CompaniesAsset-Backed Securities(Trillions of KRW)
2018 2019
Amount 49.4 51.7
Number of issues 163 153
Source: FSS 2019 press releases;
4. Nonbank Sector Data
E48. Mutual Savings BanksFinancial Positions(Billions of KRW)
Dec 2018 Dec 2019
Assets 69,515.7 77,148.8
Liabilities 61,729.7 68,112.0
Shareholders’ equity 7,786.0 9,036.4
Source: FSS 2019 press releases;
E49. Mutual Savings BanksSoundness Indicators(Amount in trillions of KRW, ratio in percent)
20181 20191
Assets 69.5 77.2
Loans 59.2 65.1
Deposits 59.8 65.9
Net income2 1.1087 1.2778
Loan delinquency ratio 4.3 3.7
SBL ratio 5.1 4.7
BIS capital ratio 14.33 14.84
Source: FSS 2019 Annual Report;
Notes: 1 Figures from 79 mutual savings banks in business in 2018 and 2019; 2 January-December net income for 2018 and 2019;
142
E50. Mutual Savings BanksDelinquency Rate(Percent)
Dec 2018 Dec 2019
Business loans 4.2 3.9
Self-employed 4.0 4.3
Household loans 4.6 3.6
Mortgage loans 1.8 3.0
Unsecured loans 6.3 3.8
Aggregate 4.3 3.7
Source: FSS 2019 press releases;
E51. Mutual Savings BanksSBL and Coverage Ratios(Percent)
Dec 2018 Dec 2019
SBL ratio 5.1 4.7
Coverage ratio 115.2 113.0
Source: FSS 2019 press releases;
E52. Mutual Savings BanksRisk-Weighted Assets and Capital Ratio(Amount in billions of KRW, ratio in percent)
Dec 2018 Dec 2019
Shareholders’ equity 8,239.7 9,550.5
Risk-weighted assets 57,540.1 64,143.8
BIS capital ratio 14.32 14.89
Source: FSS 2019 press releases;
143
E53. Mutual Savings BanksNet Income(Billions of KRW)
2018 2019
Operating income 1,319.5 1,539.5
Interest income 4,181.1 4,458.7
Non-interest income -380.9 -385.0
Selling and administrative expenses 1,234.5 1,361.8
Provision for loan losses 1,246.3 1,172.3
Nonoperating income -211.1 -267.3
Net income 1,108.4 1,272.3
Source: FSS 2019 press releases;
E54. Specialized Credit Finance CompaniesSoundness Indicators(Amount in trillions of KRW, rate and ratio in percent)
2018 2019
Credit card companies1 Credit card assets2 112.0 119.2
Net income3 1.4 1.3
Delinquency rate 1.5 1.4
Adjusted capital ratio 22.9 22.3
Specialized credit finance companies excluding credit card companies
Assets 143.5 161.7
Net income3 1.9 2.1
Delinquency rate 1.9 1.7
Adjusted capital ratio 16.3 16.1
Source: FSS 2019 Annual Report;
Notes: 1 Credit card companies refer to credit card issuers that provide credit card services only; they
are Shinhan, Samsung, Hyundai, Lotte, Hana, BC, KB Kookmin, and Woori.2 Includes credit card assets of banks providing credit card services;3 Net income after loan loss provisions for companies under K-IFRS;
144
E55. Specialized Credit Finance Companies (excluding credit card companies)Assets(Trillions of KRW)
Dec 2018 Dec 2019
Inherent assets 56.0 62.2
Facility leasing 29.0 32.0
Installment financing 25.3 27.8
Venture capital business 1.8 2.4
Loans 68.9 76.7
Household loans 26.4 26.5
Business loans 42.5 50.2
Securities 11.4 14.5
Others 7.2 8.3
Total 143.5 161.7
Source: FSS 2019 press releases;
E56. Specialized Credit Finance Companies (excluding credit card companies)Net Income(Billions of KRW)
2018 2019
Inherent business 2,716.3 2,781.0
Installment financing 1,237.4 1,258.5
Facility leasing 1,251.9 1,310.9
Venture capital business 227.0 301.6
Interest revenues 5,314.0 5,669.7
Funding costs 2,781.8 3,048.7
Selling and administrative expense 2,069.9 2,149.7
Bad debt expenses 1,564.2 1,622.4
Total 1,944.5 2,055.7
Source: FSS 2019 press releases;
145
E57. Credit Card CompaniesNumber of Credit Cards Issued(Number in millions of KRW)
Dec 2018 Dec 2019
Number of credit cards issued 105.06 110.97
Number of dormant credit cards 8.71 10.55
Percent of dormant credit cards 8.3 9.5
Number of check cards issued 111.58 110.94
Source: FSS 2019 press releases;
E58. Credit Card CompaniesCredit Card and Check Card Purchases(Trillions of KRW)
2018 2019
Credit card purchases 664.0 701.0
Check card purchases 168.6 173.7
Total 832.6 874.7
Source: FSS 2019 press releases;
E58. Credit Card CompaniesCredit Card and Check Card Purchases(Trillions of KRW)
2018 2019
Credit card purchases 664.0 701.0
Check card purchases 168.6 173.7
Total 832.6 874.7
Source: FSS 2019 press releases;
E59. Credit Card CompaniesCash Advances and Loans(Trillions of KRW)
2018 2019
Cash advances 60.7 59.1
Loans 43.1 46.1
Total 103.8 105.2
Source: FSS 2019 press releases;
146
E60. Credit Card CompaniesCredit Card Delinquency Rate(Percent)
Dec 2018 Dec 2019
Aggregate Assets 1.48 1.43
Credit card assets 1.32 1.24
Receivables 0.72 0.69
Loans 2.44 2.29
Source: FSS 2019 press releases;
E61. Credit Unions and CooperativesFinancial Soundness Indicators(Amount in trillions of KRW, rate and ratio in percent)
2018 2019
Assets 505.9 546.1
Net income 2.6 2.2
Loans 347.7 365.4
Deposits 428.0 464.0
Delinquency rate 1.32 1.71
SBL ratio 1.52 2.04
Net worth ratio 8.09 8.10
Source: FSS 2019 Annual Report;
147
5. Foreign Debt and Equity Investment Data
E62. Foreign InvestorsNet Stock and Bond Investment(Billions of KRW)
2018 2019 CumulativeholdingsYear H1 H2 Nov Dec
Stocks -6,678 -3,900 -2,778 -2,839 810 593,191
Bonds 15,625 12,021 3,604 -1,776 -2,491 123,651
Total 8,947 8,121 826 -4,615 -1,681 716,842
Source: FSS 2019 press releases;
E63. Foreign InvestorsNet Stock Investment and Cumulative Holdings(Billions of KRW)
2018 2019
Year Dec Oct Nov Dec
Net stock investment 116 -6,678 -348 -2,839 810
Stocks bought 38,034 541,476 36,817 39,359 39,642
Stocks sold 37,918 548,154 37,166 24,198 38,814
Cumulative stock Holdings 509,720 560,579 558,406 593,191
Source: FSS 2019 press releases;
E64. Foreign Investors2019 Net Bond Investment by Investor Region, Bond Class, and Maturity(Billions of KRW)
Investor region Bond class Remaining maturity
Asia -247 Korean Treasury Bonds -975 Less than 1 year -4,872
Middle East -423 Monetary Stabilization Bonds -1,486 1 to 5 years 2,204
Europe -734 Corporate bonds 10 More than 5 years 177
Source: FSS 2019 press releases;
148
E65. Foreign InvestorsNet Bond Investment and Cumulative Bond Holdings(Billions of KRW)
2018 2019
Dec Year Oct Nov Dec
Net bond investment 1,479 15,625 -189 -1,776 -2,491
Net purchases 5,956 50,930 3,164 1,387 4,050
Redemptions 4,477 35,305 3,353 3,163 6,541
Cumulative bond holdings 113,797 126,537 124,776 123,651
Source: FSS 2019 press releases;
E66. Foreign InvestorsNet Stock Investment by Country(Billions of KRW)
2018 2019
Year Oct Nov Dec
U.K. -8,806 1,342 462 1,198
France 544 -70 -102 869
Cayman Islands -2,806 -353 -560 522
Hong Kong 1,015 -36 79 492
Australia 45 -71 -311 397
Ireland 359 3 380 317
UAE -118 -61 32 -67
Mexico -28 1 1 -80
Germany 139 80 159 -270
Japan 769 7 64 -340
Singapore 2,862 53 -375 -356
U.S. 7,317 -2,094 -2,386 -2,904
Others -7,970 851 -282 1,032
Total -6,678 -348 -2,839 810
Source: FSS 2019 press releases;
149
E67. Foreign InvestorsCumulative Stock Holdings by Country(Billions of KRW)
2018 2019
U.S. 218,293 251,678
U.K. 41,621 47,876
Luxembourg 31,963 38,479
Singapore 27,893 34,069
Ireland 18,684 22,391
Netherlands 15,627 18,003
Canada 14,926 17,296
Norway 12,270 15,007
Australia 11,062 14,482
Japan 12,487 13,987
China 10,066 12,534
Cayman Islands 6,963 11,136
Switzerland 7,672 9,162
Hong Kong 5,902 8,012
Saudi Arabia 6,755 7,863
UAE 7,190 7,702
France 4,505 5,836
Others 55,840 57,678
Total 509,720 593,191
Source: FSS 2019 press releases;
E68. Foreign InvestorsNet Bond Investment by Bond Types(Billions of KRW)
2018 Dec 2019 YTD 2019
Korean Treasury Bonds 8,506 -975 10,698
Agency bonds issued by qualified state-affiliated enterprises 7,185 -1,526 -1,501
Monetary Stabilization Bonds issued by the Bank of Korea 6,966 -1,486 -1,401
Corporate bonds -66 10 22
Municipal bonds issued by local government authorities - - -
Total 15,625 -2,491 9,219
Source: FSS 2019 press releases;
150
E69. Foreign InvestorsCumulative Bond Holdings by Bond Types(Billions of KRW)
2018 Dec 2019
Korean Treasury Bonds 86,646 98,528
Agency bonds issued by qualified state-affiliated enterprises 27,107 25,060
Monetary Stabilization Bonds issued by the Bank of Korea 26,227 24,281
Corporate bonds 43 63
Municipal bonds issued by local government authorities - -
Total 113,797 123,651
Source: FSS 2019 press releases;
6. Other Selected Data
E70.Corporate Debt and Equity(Billions of KRW)
2018 2019
Equity issues 8,895.9 5,317.2
IPOs 2,314.9 2,467.7
Secondary offerings 6,581.0 2,849.5
Debt Issues 160,918.3 170,182.7
Corporate 35,659.0 45,306.2
Financial 109,129.9 109,902.9
Asset-backed securities 16,129.4 14,973.6
Total 169,814.2 175,499.9
Source: FSS 2019 press releases;
151
E71.Commercial Papers and Short-Term Electronic Bond Issues(Billions of KRW)
2018 2019
Commercial papers 353,699.4 388,843.8
Short-term electronic bonds 1,117,516.1 1,123,162.7
Total 1,471,215.5 1,512,006.5
Source: FSS 2019 press releases;
E72. Real Estate Trust CompaniesAsset under Management(Trillions of KRW)
Dec 2018 Dec 2019
Land trusts 64.9 70.8
Development-type 8.4 8.4
Administration-type 56.5 62.4
Collateral trusts 125.0 144.2
Brokerage trusts 8.0 6.8
Disposition trusts 6.2 6.1
Management trusts 2.7 2.7
Asset under management (AUM) 206.8 230.6
Source: FSS 2019 press releases;
E73. Real Estate Trust CompaniesAsset under Management(Billions of KRW)
Dec 2018 Dec 2019
Assets 4,710.7 5,603.4
Liabilities 2,030.0 2,343.9
Shareholders’ equity 2,680.7 3,259.5
Net capital ratio (%) 856 905
Source: FSS 2019 press releases;
152
E74. Real Estate Trust CompaniesFinancial Soundness(Billions of KRW)
Dec 2018 Dec 2019
Assets subject to asset classification 3,523.1 3,986.9
(SBLs) 827.3(23.5%)
1,142.3(28.7%)
Shareholders’ equity 3,224.6 3,631.9
(SBLs) 781.2(24.2%)
1,074.0(30.0%)
Source: FSS 2019 press releases;
E75. Real Estate Trust CompaniesIncome Statement(Billions of KRW)
Dec 2018 Dec 2019
Fees/commissions 776.4 788.1
Development-type land trusts 444.4 362.5
Administration-type land trusts 184.1 272.1
Collateral trusts 109.7 126.2
Brokerage trusts 32.8 20.0
Disposition trusts 3.5 5.2
Management trusts 1.9 2.1
Interest on loans to trust accounts 199.4 240.7
Revenue from ancillary business 190.4 188.5
Others 52.2 86.3
Operating revenues 1,218.4 1,303.6
Selling and administrative expenses 335.0 410.4
Bad debt expense 129.0 162.8
Interest expense 43.9 65.5
Others 30.1 20.4
Operating expense 538.0 659.1
Operating income 680.4 644.5
Net income 507.9 480.0
Source: FSS 2019 press releases;
153
E76.Number of FSS-Supervised Financial Institutions
2018 2019
Financial holding companies 9 10
Banks
Commercial banks
National banks 8 8
Regional banks 6 6
Specialized banks 5 5
Foreign bank branches 38 36
Nonbank financial institutions
Mutual savings banks 79 79
Specialized credit finance companies
Credit card companies 8 8
Leasing companies 25 26
Installment finance companies 21 23
New technology venture capital companies 51 58
Credit unions 888 883
Agricultural, fisheries, and forestry cooperatives 1,349 1,345
Insurance companies
Life 24 24
Nonlife
General nonlife insurance companies 19 20
Reinsurance insurance companies 10 10
Guaranty insurance companies 1 1
Financial investment service providers
Securities companies 56 56
Asset management companies 243 292
Investment advisory companies 185 198
Merchant banks 1 1
Money brokerage companies 3 3
Futures companies 5 4
Source: FSS 2019 Annual Report;
154
E77.Number of Regulatory Authorizations and Approvals in 2019
Authorizations Approvals Total
Business- related
Branch-Related
Merger-related Others
Financial holding companies 1 - - - - 1
Banks 1 2 1 - 5 9
Nonbank financial institutions - - - - - -
Mutual savings banks - 9 1 - 4 14
Specialized credit finance companies - - - - 11 11
Credit unions - - - - - -
Agricultural, fisheries, and forestry cooperatives
- - - - - -
Insurance companies 2 - - - 4 6
Financial investmentservice providers - - - - - -
Securities companies 7 - - - 25 32
Asset managementcompanies 51 - - - 30 81
Credit information service providers - - - - 7 7
Total 62 11 2 - 86 161
Source: FSS 2019 Annual Report;
155
E78.Number of Financial Firms Licensed in 2019
Beginning of year Mergers Closures* Newly
LicensedEnd ofyear
Financial holding companies 9 - - - 10
Banks 57 - - - 55
Merchant banks 1 - - - 1
Money brokerage companies 3 - - - 3
Mutual savings banks 79 - - - 79
Specialized credit finance companies 105 - - 10 115
Credit unions 888 1 4 - 883
Agricultural, fisheries, and forestry cooperatives 1,349 4 - - 1,345
Life insurance companies 24 - - - 24
Nonlife insurance companies 30 - - 1 31
Securities companies 56 - - - 56
Futures companies 5 - 1 - 4
Asset management companies 243 - 2 51 292
Investment advisory companies 185 - 21 34 198
Source: FSS 2019 Annual Report;
Note: Closure includes revocation of the business license, bankruptcy, dissolution, cancellation of registration, and voluntary liquidation.
156
E79.Financial Firms and Organizations Subject to FSS Supervision in 2019
Number Financial firms and organizations
Financial holding companies 10
KB Financial Group · Shinhan Financial Group · Hana Financial Group · Woori Financial Group · Korea Investment Holdings · Meritz Financial Group · BNK Financial Group · DGB Financial Group · NongHyup Financial Group · JB Financial Group
Banking institutions 55 National banks (6) · Regional banks (6) · Internet banks (2) · Specialized banks (5) · Foreign bank branches (38)
Nonbank financial institutions 3,663
Mutual savings banks (79) · Korea Federation of Savings Banks · Agricultural cooperatives (1,118) · Fisheries cooperatives (90) · Forestry cooperatives (137) · Credit unions (883) · National Credit Union Federation of Korea · National Agricultural Cooperative Federation · National Federation of Fisheries Cooperatives · Credit card companies (8) · Installment finance companies (23) · Leasing companies (26) · New technology venture companies (58) · Moneylenders (1,234) · Credit Finance Association · Consumer Loan Finance Association
Insurance companies 60
Life insurance (24) · Nonlife insurance (18) · Foreign nonlife insurance branches (13) · Korea Life Insurance Association · General Insurance Association of Korea · Korea Fire Protection Association · Korea Insurance Institute · Korea Insurance Development Institute
Financial investment service providers
1,670
Securities companies (45) · Domestic branches of foreign securities firms (11) · Futures companies (4) · Credit rating companies (4) · Bond rating companies (4) · Fund rating companies (4) · CR REITs (238) · Merchant bank (1) · Money brokerage companies (10) · Asset management companies (292) · Investment advisory firms (198) · Private Equity Funds(676) · General administration service providers (7) · Ship investment management companies (5) · Ship investment companies (140) · Real estate investment trusts (14) · Fund Online Korea · Korea Exchange · Korea Financial Investment Association · Korea Securities Depository · Korea Securities Finance Corporation · Korea Listed Companies Association · KOSDAQ Listed Companies Association · KONEX Association · Online small investment intermediaries (9)
Others 241
Money Transfer Operators (26) · Electronic financial services providers (110) · Credit information service providers (29) · Korea Association for ICT Promotion · Korea Housing Finance Corporation · Korea Asset Management Corporation · Value added networks (27) · Korea Credit Information Services · Korea Workers’ Compensation and Welfare Service · Innovative financial services providers (33) · Designated agents (11)
Total* 5,699
Source: FSS 2019 Annual Report;
Note: The 5,699 total figure does not include three retail credit card issuers, 31,060 general agencies (insurance), 21 insurance actuaries, 1,327 insurance claims adjusters, 147 insurance brokers, 198 offshore investment advisory companies, and 164 accounting firms.
FSS HANDBOOK 2020
Published by:International Affairs Department (Financial Hub Korea)Financial Supervisory ServiceSeoul, Korea
Email: [email protected]
